As the new tax year approaches on 6th April 2025, it's time to make important decisions about your salary for the year ending 5th April 2026. Following changes introduced in the Autumn Budget 2024, selecting the right salary is more important than ever for tax efficiency and financial planning.

Key Updates from the Autumn Budget:

1. The Employer's National Insurance threshold has been reduced from £9,100 to £5,000.
2. The Employer's National Insurance rate has increased from 13.8% to 15%.
3. The Employment Allowance for National Insurance has risen from £5,000 to £10,500.

These changes have altered the financial landscape for directors, bringing £12,570 to the forefront as the most tax-efficient salary for many.

Comparing Salary Levels: Why £12,570 Stands Out

Here’s how £12,570 compares to other salary levels in terms of tax efficiency and qualifying National Insurance Contributions:

£12,570 Annual Salary (£1,047.50/month)

• This salary meets National Insurance thresholds, ensuring that the year is marked as a qualifying one for National Insurance Contributions. This is essential for maintaining your state pension entitlement and benefits.
• While Employer National Insurance contributions are required, they are deductible against Corporation Tax, lowering your overall tax liability.
• A salary at this level creates a significant expense in the company, reducing Corporation Tax payable. It also allows dividends to be taken up to the higher-rate tax threshold, optimizing personal taxation.
• Overall, this salary achieves a balance between creating company expenses, qualifying NICs, and reducing tax liabilities.
• The estimated net annual tax benefit compared to no salary, is up to £888.

£6,396 Annual Salary (minimum for NIC qualification)

• While this salary is sufficient to qualify the year for National Insurance purposes, it doesn’t achieve the same level of tax efficiency as £12,570.
• Employer National Insurance contributions are reduced, but fewer Corporation Tax deductions are available, resulting in higher overall tax liabilities.
• This amount is not optimal for balancing salary and dividends within tax thresholds.
• The estimated net annual tax benefit compared to no salary, is up to £581.

£9,096 Annual Salary (£758/month, previously recommended alternative)

• Although this salary was previously tax-efficient in prior years, recent changes in the National Insurance thresholds and rates mean that the overall benefit of paying this level is no longer significant.
• Employer National Insurance contributions are lower, but the balance between salary and dividends isn’t as tax-effective compared to £12,570.
• The estimated net annual tax benefit compared to no salary, is up to £344.00.

No Salary

• Choosing not to take a salary means that the year will not qualify for National Insurance Contributions unless you make a voluntary payment (£907.40 for the current year). This voluntary payment adds an extra financial burden.
• Without a salary, there is limited opportunity to reduce Corporation Tax, and dividends become the sole taxable income, which may result in higher personal tax bills.
• Over time, failing to qualify for NIC years can impact your entitlement to state pensions and other benefits.

*All Tax & NI figures are estimated until the payslip and liability are provided, for illustration purposes only.

**Actual annual tax benefit will depend on rates of Corporation and additional personal income and expenditure

Understanding the Employment Allowance

The Employment Allowance provides companies with relief from Employer National Insurance contributions up to a specified limit. This allowance has increased from £5,000 to £10,500 for the year ending 5th April 2026, offering significant benefits for businesses with multiple employees.

For companies with multiple employees or directors, the increased Employment Allowance means:

• The first £10,500 of Employer National Insurance contributions are not payable, creating substantial savings for businesses.
• Salaries exceeding the Employer National Insurance threshold (£5,000) become more tax-efficient for each employee, as the allowance effectively offsets the increased contribution rate (15%).
• Businesses employing additional staff or directors can fully utilize the allowance, reducing overall payroll costs and maximizing tax benefits.

For sole directors, however, the Employment Allowance is generally not available unless there are other employees on the payroll. This makes it less advantageous for one-person companies, but it highlights the potential financial benefits of adding another director or employee to the business.

In Summary

Selecting £12,570 as your annual salary helps you optimize your tax liabilities, reduce Corporation Tax, and maintain your National Insurance record. For businesses with multiple employees, fully utilizing the Employment Allowance can further enhance tax efficiency, making this an important consideration for your company’s financial strategy.

For tailored advice, reach out to your dedicated accountant to discuss your specific situation.

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