Recommended Salary for Limited Company Directors in the 2025/26 Tax Year
- Published: 27 March 2025
- 4 min read
- Tax & VAT, Running a Business
Heather Cameron
Author
Heather believes in the power of great storytelling and is here to craft compelling copy that informs and inspires readers. With an extensive background in digital marketing, she has experience writing for various industries, from finance to travel. As Osome’s copywriter, Heather creates content that empowers entrepreneurs and small business owners to boost their business with expert guidance, helpful accounting tips and insights into the latest fintech trends.
Mosan Ali
Reviewer
Mosan Ali is our Accounting Manager based in the UK and has a wealth of knowledge of UK GAAP, VAT, and PAYE. With 12 years of experience crunching numbers and ensuring compliance, he keeps our financial reporting ship-shape. Think of Mosan as our blog's accounting guru. He carefully reviews our UK-focused content, ensuring it's accurate, up-to-date, and packed with helpful tips for UK businesses. Get your taxes right from day one with our informative blog posts.
As a director of a limited company, the way you pay yourself can significantly impact how much tax you pay. The best approach is usually a combination of salary and dividends. This guide will help you understand your options and choose the most tax-efficient salary for the 2025/26 tax year.
Key Takeaways
- By combining your salary and dividends, you can effectively reduce the amount of tax you need to pay, making it a smart strategy for limited company directors.
- Make sure to utilise your full £12,570 personal allowance, as this allows you to maximise the amount of income you receive without having to pay income tax.
- It's beneficial to consult a tax professional who can provide tailored advice, ensuring that you are following the most tax-efficient approach for your specific circumstances.
Why Take a Salary?
Paying yourself a salary has several benefits:
- Uses your tax-free Personal Allowance(£12,570 for 2025/26)
- Qualifies you for state pension and benefits(if above the Lower Earnings Limit)
- Reduces your company’s corporation tax(salary is a business expense)
- Minimises National Insurance (NI) liabilities
Since dividends are taxed at lower rates than salary, the most tax-efficient strategy is to take a small salary and top up your income with dividends.
Osome’s accounting experts help limited company directors optimise their salary and dividend mix to minimise tax liabilities while ensuring compliance. We handle payroll, tax calculations, and filings—so you can focus on growing your business.
What’s the Best Salary for 2025/26?
Your optimal salary depends on whether you’re the only director or have other employees on the payroll. Here are the three most tax-efficient options:
If you are a sole director with no other employees
You have three choices for your salary.
Option 1: £5,000 per year (minimal salary):
- No Income Tax
- No Employee or Employer National Insurance
- Downside: Does not count as a qualifying year for your state pension
- Best for: Keeping things simple and avoiding NI completely
Option 2: £6,500 per year(lower earnings limit):
- No Income Tax
- Small Employer NI contribution of £225
- Counts as a qualifying year for the state pension
- Best for: Ensuring state pension benefits at the lowest NI cost
Option 3: £12,570 per year(full personal allowance):
- No Income Tax
- Employer NI due: £1,135.50
- Qualifies as a full state pension year
- Corporation tax savings offset the NI cost
- Best for: Maximising your tax-free earnings while keeping NI manageable
Most directors choose either Option 2 or 3, depending on whether they want to minimise NI or take full advantage of the Personal Allowance.
If you have other directors or employees
If your company has at least one other director or employee(earning over £5,000), you qualify for the Employment Allowance, which reduces your company’s Employer NI liability by up to £10,500.
Recommended Salary: £12,570 per year
- No Income Tax
- No Employee NI
- No Employer NI (covered by Employment Allowance)
- Counts as a qualifying year for the state pension
- Saves corporation tax by reducing taxable profits
This is the best option if you qualify for Employment Allowance, as it gives you the maximum tax-free salary with no extra NI costs.
Get our free guide on key accounting questions you need to ask
In this guide, we summarize the questions you should be asking your accountant and provide answers to these questions
What Are the Key Tax Thresholds for 2025/26?
- Personal Allowance: £12,570 (income below this is tax-free)
- Lower Earnings Limit (LEL): £6,500 (minimum salary for state pension credit)
- Class 1 NI Secondary Threshold: £5,000 (salary above this triggers Employer NI)
- Employment Allowance: £10,500 (offsets Employer NI for eligible companies)
- Employer NI Rate: 15% (applies to earnings above £5,000, unless covered by Employment Allowance)
Qualifying for a State Pension
If your salary is below £6,500, it does not count as a qualifying year for your state pension, meaning you won't receive state pension credits. However, if your salary is £6,500 or more, it qualifies as a year for state pension purposes, ensuring you receive the necessary credits for your future state pension benefits.
What About Dividends?
Dividends incur a lower tax rate compared to salaries, standing at 8.75% for basic-rate taxpayers. They are distributed after corporation tax has been applied. By integrating a tax-efficient salary with dividends, you can effectively minimise your total tax liability.
If you’re unsure which option is right for you, we can help. Get in touch, and we’ll ensure you set up your payroll in the most tax-efficient way.
Summary
In the 2025/26 tax year, limited company directors can optimise their income by strategically combining salary and dividends. By utilising the £12,570 personal allowance, directors can receive a tax-free salary, while dividends offer a lower tax rate than salaries, thus minimising overall tax liability. Choosing the right salary level, whether as a sole director or with employees, ensures eligibility for state pension benefits and reduces national insurance contributions. Consulting a tax professional can provide tailored advice to make the most tax-efficient decisions for your limited company's finances.
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