Optimal Director Remuneration Planning in 2025/26

Owner-managers of limited companies face a set of remuneration decisions that employees of larger organisations do not. The flexibility to choose between salary, dividends, pension contributions, and benefits in kind — and to time each within the tax year — creates genuine tax planning opportunities. Executed well, a director remuneration strategy can reduce the combined personal tax and National Insurance burden materially; executed carelessly, it can create unexpected liabilities, disrupt benefit entitlements, or fall foul of HMRC anti-avoidance rules.

This guide covers the current structure in 2025/26 and the decisions most directors face.

The Low Salary / High Dividend Model

The cornerstone of most owner-managed company tax planning is taking a modest salary (typically at or around the National Insurance lower earnings limit or primary threshold) and extracting most profit as dividends. The logic:

• Corporation tax on company profit: 25% (for companies with profits above £50,000 in 2025/26, with marginal relief between £50,000 and £250,000 if there are associated companies).
• Dividend tax: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate) on dividends above the £500 annual allowance.
• Combined tax on dividends for a higher-rate director: corporation tax at 25% + dividend tax at 33.75% = approximately 50% total — but only on the profit, not on turnover, and the National Insurance saving relative to salary is significant.
• Salary vs dividend NI comparison: Salary above the secondary threshold (£9,100/year for 2025/26) attracts employer NIC at 15% (increased from 13.8% in April 2025) and employee NIC at 8% (or 2% above the upper earnings limit). No NIC on dividends.

For a basic-rate taxpaying director extracting £50,000 from a company:

• As dividends (assuming above the personal allowance): dividend tax at 8.75% on the amount above the £500 allowance — effective rate far lower than salary NIC + income tax.
• As salary: 15% employer NIC + 8% employee NIC + 20% income tax = ~40%+ combined on that slice.

The model is well-established and entirely legal; it is the rational response to the structure of UK tax law.

Salary at the Right Level: NI Credits and the Personal Allowance

The optimal salary for most owner-directors in 2025/26 is the National Insurance Lower Earnings Limit (LEL) or Primary Threshold (PT):

• LEL: £6,396 per annum for 2025/26. Paying salary at or above the LEL (but below the PT of £12,570) earns the director a qualifying year for state pension and contributory benefits (statutory sick pay, maternity pay, etc.) without triggering either employee or employer NIC.
• PT: £12,570 per annum for 2025/26. Paying salary up to the PT uses the personal allowance (saving 25% corporation tax on the additional £6,174 vs paying at LEL) without triggering employee NIC, but does trigger employer NIC above the Secondary Threshold of £9,100.

The "sweet spot" depends on the director's personal allowance position:

• If the director has no other income, a salary of £12,570 is typically most efficient: the salary is deducted against corporation tax at 25%, and no income tax is payable (covered by personal allowance). Employer NIC of 15% applies on salary between £9,100 and £12,570 = £528 — a cost that may be offset by the corporation tax saving.
• If the director has a spouse who is also a shareholder and employee, similar planning can be applied to that spouse, extracting another £12,570 at similarly low tax rates.

Employment Allowance

The Employment Allowance allows eligible employers to reduce their employer NIC bill by up to £10,500 in 2025/26. However, where the company has only one employee (the sole director) who is also the sole paid employee, the Employment Allowance is not available. It becomes available once a second employee (e.g., a working spouse) is added to the payroll.

Employer Pension Contributions

Employer (company) pension contributions are a corporation-tax-deductible expense and do not attract employer NIC. This makes them one of the most tax-efficient forms of remuneration:

• A company paying a £50,000 employer pension contribution to the director's SIPP or workplace pension:
  • Deducts the full £50,000 from corporation tax profit — saving £12,500 at 25%;
  • No employer NIC;
  • No employee NIC;
  • No income tax on the contribution (though tax applies on pension withdrawal at the director's then-marginal rate).

The annual allowance (£60,000 for 2025/26, subject to the tapered allowance for high earners) caps total pension contributions. The £60,000 allowance covers both employee and employer contributions combined. Carry forward from the previous three years is available.

For owner-managers approaching retirement, maximising employer pension contributions in the final years before winding down the company — or before taking pension benefits — is one of the highest-value tax planning actions available.

Salary Sacrifice for Additional Tax Efficiency

Even within the existing salary payment, salary sacrifice can reduce the NIC cost further:

• The director sacrifices part of their salary in exchange for a non-cash benefit (pension, cycle-to-work, electric vehicle);
• This reduces the employer's NIC liability on the sacrificed amount (15% saving);
• The employee avoids income tax and NIC on the sacrificed amount.

Electric vehicles as a salary sacrifice benefit are particularly attractive in 2025/26: the company leases an EV and the employee sacrifices salary to cover the lease cost. The benefit-in-kind rate on EVs is very low — 3% for 2025/26, rising to 4% for 2026/27 — making the effective tax cost of the vehicle much lower than taking equivalent salary.

Benefits in Kind vs Cash

Certain benefits in kind can be provided to employees (including directors) more tax-efficiently than cash:

• Trivial benefits: gifts under £50 per occasion (not cash or cash vouchers), not part of a contractual entitlement, and not in recognition of services — completely free from income tax and NIC for both employer and employee. A common approach is a quarterly gift from the company of up to £50 (e.g., a restaurant voucher) — four per year is £200 per director, tax-free, costing the company £200 plus a small corporation tax saving.
• Annual staff function exemption: up to £150 per head per year on qualifying annual functions (a Christmas dinner, summer party) is exempt from income tax.
• Mobile phones: one mobile phone per employee provided by the employer is exempt from benefit-in-kind tax.
• Broadband: where business use can be demonstrated, employer-paid broadband may not constitute a taxable benefit.

Benefits that are taxable as benefits in kind and generate P11D reporting obligations include cars, private medical insurance, and company loans. These should be reviewed annually against the cost of the NIC and income tax they generate.

Year-End Planning: Timing Dividend Payments

The UK tax year runs 6 April to 5 April. Dividends are taxed in the year they are paid (or made available). Key year-end decisions:

• Deferring dividends: if declaring a dividend before 5 April would push the director into the additional-rate band, deferring to the new tax year (even by one day) can save tax at the margin.
• Using the basic-rate band: where a director's income will vary between years, modelling which year is better for a large dividend extraction is worthwhile.
• Spouse dividend income: dividends paid on shares held by a lower-rate-taxpaying spouse use their basic-rate band first, at 8.75% rather than 33.75%.

HMRC's "settlements legislation" (s624-628 ITTOIA 2005) can challenge arrangements where income is diverted to a spouse who has no genuine ownership interest or economic risk. Ordinary share structures where both spouses hold shares from inception are generally safe; arrangements that appear to attribute income to a non-participating spouse purely for tax purposes are at risk.

How Global Investments Can Help

Director remuneration planning needs annual review as rates, allowances, and business circumstances change. The introduction of the Employment Allowance threshold, the corporation tax increase in 2023, and the employer NIC rise in April 2025 have all shifted the optimal salary level. Our advisers work with owner-managers to model the most efficient combination of salary, dividends, pension, and benefits in kind for their specific circumstances — co-ordinating with the company's accountant as appropriate. Contact us to review your remuneration structure for 2025/26.