Director Remuneration in 2025/26

Introduction

For owner-managed companies, how a director draws income is one of the most consequential tax decisions made each year. Get it right and you can retain significantly more of your business profits; get it wrong and you may face unnecessary National Insurance Contributions (NICs), higher income tax bills, or missed pension opportunities.

This article sets out the main considerations for 2025/26, covering the interplay between salary, dividends, and employer pension contributions.

The Classic Strategy: Low Salary, High Dividends

The most common remuneration structure for owner-directors involves paying a salary at or around the National Insurance lower earnings limit (LEL) or the personal allowance threshold, then extracting remaining profits as dividends.

Why a Low Salary?

Salary is subject to both employee and employer Class 1 NICs. For 2025/26, the employer NIC rate is 15% on earnings above the secondary threshold (currently set at £5,000 following the Autumn 2024 Budget changes), and employees pay 8% between the primary threshold and the upper earnings limit.

By setting salary at the LEL (£6,396 for 2025/26), a director preserves their State Pension qualifying year without incurring any NIC liability for either party. Setting salary at the personal allowance (£12,570) extracts income tax-free but triggers a small employer NIC liability — the Employment Allowance (up to £10,500 from April 2025) may offset this for eligible companies.

Key point: Sole director companies with no other employees are not eligible for the Employment Allowance. If the director is the only employee, factor employer NICs into the salary decision.

Dividends: Tax-Efficient but Not Tax-Free

Dividends are paid from post-corporation-tax profits and are not subject to NICs. They benefit from a separate set of tax rates: 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band.

Each individual retains a dividend allowance — currently £500 for 2025/26 — within which dividends are received tax-free. Where a spouse or civil partner holds shares, dividends can be distributed to utilise their allowances and lower rate bands, subject to settlement legislation considerations.

Crucially, dividends are not an allowable deduction for corporation tax purposes, whereas salary and employer pension contributions are. This must always be factored into the comparison.

Employer Pension Contributions: The Often Overlooked Tool

Employer pension contributions are frequently the most tax-efficient extraction method available to owner-directors. They are:

• Deductible against corporation tax (subject to the 'wholly and exclusively' test under CTA 2009 s.54)

• Not subject to NICs for either employer or employee

• Not linked to the director's level of earnings (unlike personal contributions, which are capped at 100% of UK earnings)

• Received within a pension wrapper, allowing tax-free growth until drawdown

  
  

The annual allowance for 2025/26 remains at £60,000, but unused allowance from the three prior tax years may be carried forward where the individual was a member of a registered pension scheme. This can create a significant planning opportunity where a company has accumulated reserves.

Planning point: Where a company has accumulated profits and the director has unused annual allowance, a large employer pension contribution can simultaneously reduce the corporation tax liability and build pension wealth — often more efficiently than a dividend extraction strategy.

A Worked Comparison

Consider a director who wishes to extract £80,000 from their company (which has a corporation tax rate of 25%) in 2025/26. The table below illustrates three broad approaches on a simplified basis:

Approach 1 — All Salary: Company deducts salary, paying NIC of 15% on amounts above £5,000. Director pays income tax and employee NICs. Effective combined cost is high due to NICs layering.

Approach 2 — Salary (£12,570) plus Dividends: Company pays CT on remaining profits before dividend distribution. Director pays dividend tax at 8.75% or 33.75% depending on band. More efficient than all-salary for most directors.

Approach 3 — Salary (£12,570) plus Employer Pension Contribution: Company deducts both as allowable expenditure, obtaining full corporation tax relief. Director pays no tax until pension drawdown. Often the most efficient route where pension funding headroom exists.

Points to Watch

• Ensure dividends are supported by sufficient distributable reserves — unlawful dividends may be recharacterised as loans or employment income by HMRC

• Director's loan accounts drawn in anticipation of dividends require careful management to avoid s.455 CTA 2010 tax charges

• HMRC scrutinises low salary / high dividend structures where the commercial role of the director suggests remuneration is primarily for services rendered rather than a return on capital

• Spouses and family members holding shares must have genuine economic ownership; the Arctic Systems settlement rules remain relevant for income-shifting arrangements

  
  

Conclusion

There is no single correct answer to director remuneration — the optimal strategy depends on the company's corporation tax position, the director's personal tax position, pension headroom, family circumstances, and the specific year's thresholds and rates.

We recommend reviewing remuneration strategy annually and in advance of each tax year to ensure the structure remains optimal. Please contact Fortis Accounting Ltd to discuss your individual position.