Director Payroll Planning for 2025/26: When a Small Salary Still Makes Sense
The director of payroll planning has always played a pivotal role in the tax efficiency of owner-managed businesses. With continuing legislative changes, higher operating costs, and a shifting National Insurance landscape, directors of small companies need to review their salary and dividend strategies for the 2025/26 tax year carefully. While the fundamentals of tax-efficient remuneration remain familiar, certain emerging factors—including the increased Employment Allowance from April 2025 and longer-term NIC changes—mean the traditional approach of taking a “small salary plus dividends” still holds, but requires more deliberate planning.
For Merranti clients—many of whom operate limited companies with one or more directors—the decision about how much salary to take each year is not just a compliance matter. It affects corporation tax, payroll reporting, personal tax, state pension entitlement, and the company’s overall cashflow position. This article breaks down when and why a small salary continues to make sense for directors in the 2025/26 tax year, which salary level is likely to be optimal depending on eligibility for Employment Allowance, and how to structure your remuneration to ensure maximum tax efficiency.
The Logic Behind a “Small Salary” for Directors
There are several reasons why directors traditionally opt to take a low salary:
- To reduce personal National Insurance contributions
- To minimise employer NIC for the company
- To qualify for the state pension without paying NIC
- To maximise dividend-based profit extraction
- To keep salary under key tax thresholds
- To ensure corporation tax relief on wages
These core advantages continue to apply in 2025/26, but the specific numbers and thresholds require careful attention.
Key Salary Thresholds for 2025/26
While the government has not yet announced changes that would significantly disrupt the traditional small-salary approach, several key thresholds remain essential.
Directors should remain aware of:
- Lower Earnings Limit (LEL) – income at or above this level counts towards the state pension
- Primary Threshold (PT) – above this, employees pay NIC
- Secondary Threshold (ST) – above this, employers pay NIC
- Personal Allowance – income above this begins to attract Income Tax
For 2025/26, the figures are expected to follow the current structure unless formally changed by budget announcements. The precise thresholds will be confirmed early in 2025, but the principle of staying between the LEL and ST remains a core strategy.
The Impact of Employment Allowance on Director Salary Planning
The increase of the Employment Allowance to £10,500 from April 2025 plays a significant role in salary planning for some, but not all, director-led companies.
If Your Company Is NOT Eligible for Employment Allowance
A company is not eligible if:
- It has only one employee (the director)
- That director is the only person paid above the secondary NIC threshold
Most single-director companies fall into this category.
In these cases, the traditional optimal salary is:
-
At or just above the Primary Threshold, avoiding NIC but ensuring state pension credit
- Ensuring full corporation tax relief
- Minimising administrative costs
This method remains valid for 2025/26.
If Your Company IS Eligible for Employment Allowance
Companies with:
- Two or more directors, or
- Directors plus additional employees
are typically eligible for the Employment Allowance.
In these cases, the company can use the allowance to offset employer’s NIC on salaries. This opens the opportunity to:
- Pay directors salaries above the Secondary Threshold
- Benefit from additional corporation tax relief
- Still avoid employer NIC due to the allowance
This strategy can be more tax-efficient depending on profit levels and overall remuneration plans.
Why a Small Salary Still Makes Sense in 2025/26
Despite shifting NIC rules over recent years and long-term changes announced for 2029, the small-salary model still aligns with the realities of both corporation tax and National Insurance planning.
1. It Provides State Pension Entitlement Without NIC Cost
The state pension requires a minimum level of National Insurance credits. For directors, this can be achieved through a salary at or above the LEL, even when no NIC is paid. This means:
- You maintain qualifying years toward state pension
- You do not suffer employee NIC
- Your company does not suffer employer NIC (if kept below the ST)
A salary below the LEL would not achieve this, and a salary above the NIC thresholds may cost more without proportionate benefit.
2. It Maximises Corporation Tax Relief
All salaries are deductible from company profits before corporation tax is calculated.
Given that the corporation tax rate can reach:
- 19% for small profits
- Up to 26.5% for profits in the marginal band (based on your uploaded material)
A small salary helps reduce the taxable profit of the company, meaning:
- Lower overall corporation tax
- Higher post-tax profits available for dividends
- Enhanced net extraction for the director
3. Dividends Remain More Tax-Efficient Than Salary
Directors continue to find dividends more tax-efficient, especially when:
- Operating within the basic rate band
- Managing profit extraction below the higher-rate thresholds
- Taking advantage of the in-year dividend allowance (even though reduced in recent years)
Since dividends:
- Do not attract NIC
- Are paid from post-tax profits
- Can be timed flexibly
The combination of a small salary plus dividends remains optimal.
4. Salary Above the NIC Threshold Usually Isn’t Necessary
Unless the company can offset employer NIC via Employment Allowance, a higher salary tends not to add value. Usually, the additional NIC exceeds the extra corporation tax relief.
For example:
- Increasing salary by £2,000
- Employer NIC of 13.8%
- Employee NIC depending on band
- Corporation tax relief only offsets part
- Net impact is often negative
The small-salary strategy avoids this inefficiency.
Example: Single-Director Company
A single-director company with no employees cannot claim Employment Allowance. In 2025/26:
- The director takes a salary at the NIC Primary Threshold
- They do not pay NIC
- The company does not pay NIC
- Corporation tax is reduced
- Remaining remuneration is extracted via dividends
This remains the most efficient option based on all current confirmed rules.
Example: Two-Director or Staff-Employer Company
A company with:
- Two directors on payroll, or
- A director and at least one employee
is eligible for the Employment Allowance.
In this case:
- Directors may be paid above the Secondary Threshold
- Employer NIC that would usually apply is offset by the allowance
- Corporation tax relief increases
- Directors may receive a higher net income than with a lower salary
This model becomes even more attractive with the allowance doubling to £10,500.
What Merranti Clients Should Do When Planning 2025/26 Director Salaries
To prepare for the new tax year, small business owners and directors should:
1. Confirm Whether Your Company Qualifies for Employment Allowance
This determines salary level recommendations.
2. Model Salary vs Dividend Breakdown
We can calculate the precise optimal mix based on your predicted profits.
3. Factor in Pension Salary Sacrifice (with 2029 changes in mind)
Salary sacrifice remains efficient until the £2,000 cap begins in April 2029.
4. Consider Cashflow and Payroll Timings
Different salary levels have different PAYE obligations.
5. Review the Company’s Profit Levels
If profits fall within the marginal corporation tax band, additional salary may be more beneficial.
6. Ensure Payroll Software Is Updated for April 2025
Thresholds, NIC rules, and allowances change annually.
A small salary remains a core component of tax-efficient director remuneration in 2025/26. While the precise optimal figures will depend on Employment Allowance eligibility and the director’s wider income, the underlying principle of keeping salary at or near key NIC thresholds continues to provide state pension protection, corporation tax relief, and maximum flexibility with dividends.
Merranti can help you determine the correct salary level for your situation, model your dividend options, and ensure that your remuneration remains compliant and efficient throughout the 2025/26 tax year.
To discuss your 2025/26 director salary and dividend strategy, contact Merranti
or call 01342 836557.
