News & Events
Why directors should review their salary strategy in 2025/26
16th June 2025
As we move through the 2025/26 tax year, company directors, particularly those in small or owner-managed businesses, should take time to review how they’re taking their income. Several changes to National Insurance Contributions (NICs) and Employment Allowance rules, may mean what was tax-efficient last year may now cost you more. In this article, Rowleys’ Payroll Manager, Rebecca Gotch, shares more on why directors should review their salary strategy.
What’s changed?
There are four key updates from the previous year that impact how directors might choose to pay themselves:
- Increase in employer NICs rate
The Class 1 secondary NICs rate has increased from 13.8% to 15%, raising the cost of employing someone (including yourself as a director). - Lower employer NICs threshold
The threshold at which employers start paying NICs on salary has dropped from £9,100 to £5,000. This means that the previous salary of £9096 is now irrelevant. Drawing a salary of £5K per year will mean you are under the earnings threshold for your NIC credit for the year. - Employment Allowance expanded
The restriction preventing companies with over £100,000 of NICs liabilities from claiming the Employment Allowance has been lifted. Most employers are now eligible to claim up to £10,500, though single director companies are still exempt. - Increased Employment Allowance
The allowance itself has increased from £5,000 to £10,500, which offers significant relief for eligible companies that employ staff.
What does this mean for directors?
Previously, many directors opted to pay themselves a salary just below the NICs threshold – typically £9,096 – to avoid employer NICs while still qualifying for state pension credits.
Now, with the threshold at £5,000, a salary of £9,100 will incur 15% NICs on the difference, which is £4,100, resulting in an additional cost of £615. This makes that strategy less attractive for many.
Should you drop to £5,000?
While a salary of £5,000 avoids NICs altogether, it also means missing out on state pension credits, unless you’re eligible through other means. This could impact your long-term entitlements.
Should you use the full personal allowance?
Using the full personal allowance of £12,570 could now be more efficient, especially if your company is eligible for Employment Allowance and can offset the employer NICs. According to our calculations:
- At £12,570 you maximise the use of your personal tax-free allowance.
- With Employment Allowance you may avoid employer NICs altogether.
- Without Employment Allowance NICs apply, but the overall tax cost could still be more efficient depending on your profits and dividend strategy.
Key takeaways
- Single director companies may wish to reduce their salary to around £5,000, but this comes at the cost of losing pension credits.
- Companies eligible for the Employment Allowance may benefit from increasing salaries up to the personal allowance of £12,570, making full use of tax-free income and the Employment Allowance.
- Each business is different the best option depends on your wider financial picture.
Need help choosing the right director’s salary strategy?
Our team can help you run the numbers based on your company structure and goals to determine the most tax-efficient director salary for 2025/26. Get in touch with our friendly team, who can assist you with this.