With many of our clients being sole directors of their Limited Company, the most tax efficient way of receiving income has often been to take a director’s salary and then declare dividends within a self assessment tax return. A director’s salary is a deductible expense against any company profits and dividends as a basic rate taxpayer are taxed at 8.75% rather than the traditional 20% for basic rate taxpayers.
Yet, with the upcoming changes to employers national insurance, such a strategy as a sole director or ‘one man band’ Limited Company has become less viable. The lower earnings limit (the maximum salary that you could take as a sole employee without incurring Employers NI) has been reduced from £9096 per year in 2024-25, to £5004 per year in 2025-26.
The reduction in directors salary of £4092, in simple tax terms costs the director:
£778 in corporation tax for lower rate corporation tax payers and £1023 for higher rate corporation tax payers. It also requires an extra £4092 to be taken as dividends at a cost of £358. So the cost to a Limited company affected would be betweem £1000 and £1500!
The solution?
Adding just one employee to your payroll as a director can get you the EMPLOYERS NI ALLOWANCE of £5000. This would enable the director to take the full director’s salary of £12,570 (to maximise their personal allowance) and not be subject to the employers NI charge. It is important to note that the salary paid to the additional employee must be commensurate with the role that they would have as an employee at the company.
This is a common predicament that we have experienced with many clients… could this issue also apply to you!