Briefing Note on Director’s Salaries for the 25/26 Tax Year
6th January, 2025
In this note, we explore the implications of the changes set out in the Chancellor’s budget of 30 October 2024 regarding Employers National Insurance (Employers NI) for self-employed individuals operating through a Limited Company. If you’re wondering how this affects you, this article will help clarify the key points.
Background
Self-employed workers have several options for structuring their business. Some choose to operate as a sole trader, while others opt for a Limited Company (often 100% owned by the worker or shared with a spouse), or even a Limited Liability Partnership.
For self-employed individuals operating through a Limited Company, the standard remuneration structure typically involves taking a small salary of £9,100. This salary is enough to ensure credit in the State Pension Scheme and entitlement to State benefits, without triggering the need to pay Employees or Employers National Insurance. The remaining income is usually paid as dividends from the company’s net profits.
This approach is tax-efficient at lower income levels and keeps payroll reporting simple, as there is no obligation to make monthly payments to HMRC. In fact, if the company doesn’t register for PAYE, no National Insurance record is created for the Director, which can cause issues when claiming State benefits or proving entitlement to a State pension. Therefore, we recommend all owner-directors register their companies for PAYE, even if no liability to pay arises.
It is also important to note that the legislation surrounding auto-enrolment for pensions and the minimum wage doesn’t recognise the salary paid to directors, as they are considered office holders. To formalise the employer-employee relationship, an employment contract must be in place. This provides additional benefits, including eligibility for a tax-free redundancy payment when the company is dissolved (for instance, when a director retires or transitions to employment).
The Impact of the Employers National Insurance Change
The reduction in the Employers National Insurance threshold introduces new complexities for self-employed individuals running a Limited Company, including the requirement for regular payments to HMRC.
As mentioned earlier, we currently recommend setting the director’s salary at a level that avoids paying Income Tax or National Insurance to HMRC, which makes the payroll process simpler for both the director and HMRC. However, with the reduction in the threshold for Employers NI from £9,100 to £5,000, £615 per annum will be due for each director. If the salary is increased to match the personal allowance, this amount rises to £1,136.
Payments to HMRC can be made in several ways, with the simplest being a monthly direct debit (quarterly payments are also possible). However, all options involve additional administrative work, which increases the risk of non-compliance, penalties, and interest, as well as the cost of managing a more complex payroll scheme.
Employer’s Allowance
Employer’s Allowance provides an exemption for small employers from paying Employers NI. For the tax year ending in April 2025, the allowance is £5,000, meaning employers only need to pay Employers NI once their total liability exceeds £5,000. For the 25/26 tax year, this allowance will increase to £10,500. However, when a company’s only employees are directors, it is not eligible for Employer’s Allowance. As a result, these employers will now be liable for paying Employers NI for the first time due to the reduction in the threshold.
Director’s Salary for 2025/26
Our goal is to ensure that clients’ affairs are as tax- and admin-efficient as possible. For the 25/26 tax year, we recommend increasing a director’s salary from its current level of £9,100 per annum (or £758 per month) to £12,570 per annum (or £1,048 per month). This salary amount aligns with the tax-free allowance for both Income Tax and Employees National Insurance.
Next Steps
This note provides a brief summary of the new regime as it will apply from 6 April 2025. If you have any questions about how these changes will affect you or your business, please feel free to get in touch.
