The Optimum Salary for a Sole Director in 2025/26
Posted on 20th March 2025 at 11:15
For the first time in a few years, the question “What is the optimum salary for sole directors of limited companies?” has become more complex in the 2025/26 tax year. With changes to National Insurance Contributions (NICs) looming, finding the "optimum" salary has become a complex balancing act. So, what is the magic number?
The Big Changes to Employer NICs:
The significant change is the employer's NIC rate increase, rising from 13.8% to 15%. At the same time, the secondary threshold, where employer's NICs kick in, is decreasing significantly from £9,100 to £5,000. These changes mean a larger portion of your earnings will be subject to the employer's NICs.
Why Salary Matters:
• National Insurance Contributions:
Your salary directly dictates your Class 1 NICs liabilities, both employee and employer.
• State Pension:
A sufficient salary ensures you accrue qualifying years for your state pension.
• Dividends:
Salary levels influence the amount of profit available for dividend distribution.
• Tax Efficiency:
Striking the right balance between salary and dividends is key to minimising your overall tax burden.
The 2025/26 Conundrum:
• The £5,000 Hurdle:
With the secondary threshold at £5,000, any salary above this will trigger the employer's NICs.
It is important to remember that a salary below the lower earnings limit (now higher than the secondary threshold at £6,500) will not grant a qualifying year for state pension contributions.
• Employment Allowance:
Unfortunately, sole directors without additional employees are not eligible for the Employment Allowance.
Finding Your Optimum Salary for 2025/26:
There's no one-size-fits-all answer. Your "optimum" salary depends on various factors, including:
• Profitability:
Your company's financial performance will dictate the amount available for salary and dividends.
• Personal Circumstances:
Your individual financial needs and risk tolerance play a significant role.
• Tax Planning Goals:
Minimizing overall tax liability is a primary objective.
General Guidance:
• Consider a salary that accrues a qualifying year for state pension:
This is very important for long-term financial planning.
• Balance salary and dividends:
Seek professional advice to determine the most tax-efficient split.
• Factor in the increased employer's NICs:
Adjust your financial projections accordingly. You may find that paying the salary to the personal allowance (£12,570) is still more tax efficient despite having to pay employer NICs.
• Seek Professional Advice:
They can provide personalised guidance tailored to your specific situation.
Looking Ahead:
The 2025/26 tax year presents new challenges for sole directors. By understanding the changes to NICs and carefully considering your salary strategy, you can navigate the tax maze and optimise your financial outcomes.
Disclaimer: This blog post is for informational purposes only and does not constitute professional financial advice. Always consult with a qualified accountant or tax advisor for personalised guidance.
Call Rebecca on 01604 330220
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