Transcription
Every year, directors get this wrong. And I don't blame them because the advice you'll see on lots of other channels is still based on rules from 2022, whilst HMRC's quietly moved a goalpost twice since then.
I help hundreds of small business owners structure their pay every single month. And in 2025, I've already seen people lose 2 to three grand a year just because they picked the wrong salary strategy. So, in this video, I'm going to break down the exact salary that's optimal for directors in 2025, how the thresholds work, and when it's actually smarter to run a higher salary than you've been told.
Let's cut to the chase. This year, it's still best to pay yourself 12,570 salary, even if you think you're being clever by shaving it down to dodge NIC. Every year I see people trying to duck under the threshold, tweaking their salary to avoid a few hundred quid here, a few hundred there, just in employers NIC. But this year, that tactic is now outdated. The employers NIC threshold has dropped to just £5,000 from April the 6th, and the rate jumped to 15%.
So yes, if you pay yourself 12,570, your company now pays about 1,135 in NIC. But here's the thing, your salary is tax deductible. That's £12,570 knocked off your profits. At 25% corporation tax, you're saving over £3,100. Even at 19%, you still save more than double the NIC cost. And a real bonus, you bag a qualifying year for your state pension. If you cut your salary to 5,000, you lose it as it needs to be a minimum of 6,396 to qualify. If you did that, you'd have to buy it back later for around 900 a year through voluntary class 3 contributions. So, by trying to save £1,100 now, you could be costing your future self almost the same amount every single year of retirement.
The only real exceptions if your profits are so low that corporation tax savings barely register or if you've already got other income that's nudging you near the higher rate thresholds. But we'll get into those cases more deeply later on.
Next up though, let's talk about what happens if you qualify for employment allowance, including how to know if you qualify or if your company profits are well into the six figure range. That's where high salary strategies can become even more powerful and where many directors are missing huge opportunities. And don't worry if your company profits feel more like a student's pot noodle budget than a six-figure behemoth. There's a video linked on screen now that will definitely help you get closer. Oh, and if you're finding this video helpful so far, give that like button a tickle. If you get to the end and you decide you shouldn't have tickled my like button, feel free to untickle.
Anyway, pot noodles and tickling aside, which is a phrase I didn't think I'd be using on YouTube. You've heard the base advice. Pay yourself as a director. take the NIC hit and save thousands in corporation tax. But what if you could go further? What if you're running high profits and corporation tax is chewing through your bottom line? Or your company employs more than just you? Maybe your spouse, children, or a part-timer on PAYE. Well, that's where the strategy levels up.
If your company has more than one employee, including a spouse or director, pays under 100,000 in NICs across the year, and isn't caught by exclusion rules like public sector work, then you qualify for the employment allowance worth up to £12 grand in 25/26. That allowance can wipe out employees NIC on your salary, which means you can take that 12,570 a year and not pay a penny in employees NIC. If you've never considered employing a family member, now's the time.
Now, if your company profits are in the six figures, most of that's been taxed at 25%. Which means every £1 of deductible expense saves 25p. And unlike dividends, salary is deductible. So let's say you increase your salary from 12,570 to 20,000. The extra salary £7,430. Employees NIC £1,114.50. The corporation tax saving is £1,857.50. You still come out ahead. Plus, you spread income across lower bands, reduce the dividends you need, and avoid creeping into higher rates. It's a balancing act, but once corporation tax hits 25% salary becomes even more attractive, not less.
Next, we'll dig into the dividend side of the equation. Because once you set your director's salary, the real savings come from how you blend dividends, dodge higher rate tax, and tiptoe under thresholds. HMRC would rather you didn't notice. Advice tailored to your business can save you thousands. Book a completely free discovery call with us using the link in the pinned comment. We don't bite and we won't duel you into your current accountant. Promise.
Now that you set your salary, let's talk dividends. Because unless your company only makes a few grand, salary alone isn't enough. Dividends usually make up the rest. And this is where things get a bit more dangerous. tax-wise, especially with the dividend allowance now slashed. Get the mix right, you'll stay in the lowest bands and legally save thousands. Get it wrong, you're handing 33.75% straight to HMRC.
Now, here are your 2025 allowances. 12,570 personal allowance used by salary. £500 dividend allowance, down from £1,000 last year. 8.75% tax in the basic band, 33.75% in the higher rate band, that's £50,270 plus, and 39.35% in the additional rate band. So that's if you're over 125,140. So the sweet spot is 12,570 salary and then 37,700 in dividends. That gives you total income of 50,270 right on the higher rate threshold. And the tax, well, you've got 1,135 employees NIC paid by the company plus 3,255 in dividend tax. Anything beyond that, it gets pricey really fast. That's why you need a strategy. And in a moment, we'll cover how to take 80,000 or 100,000 plus without throwing away 33% and when all salary actually beats salary plus dividends and how bringing in your spouse can double your allowances.
So, let's say you've hit that sweet spot right at the 50,270 threshold before high rate tax kicks in, but you decide that since business is going so well, you're going to look at getting that new house you've been eyeing up or maybe even a fancy car so you can not so subtly flex on your neighbors. Before you dig any deeper into your pockets, just know that if you take out any more money in dividends, you're going to be taxed at a whopping 33.75% tax. Brutal.
So, how do you keep that looming self-assessment tax bill under control? Well, here are three proven strategies.
Strategy one, use your spouse's allowance. If your partner's not earning much, you can double up. Give them shares, pay them 12,570 salary, 500 in dividend allowance, and 37K ordinary dividends. Boom. That's another 50,270. And it's tax efficient. Together with yours, you're looking at 100,540 from the same company. Yes, it's legal. Yes, HMRC allows it. And yes, they'll probably want to borrow your new Merc. That's fair. You'll need to firstly issue them shares, ideally alphabet shares if you want to control dividend splits. Pay dividends based on shareholding and not roll and keep the arrangement legal and properly documented, but it's fully compliant and incredibly powerful and we can help with that as well. There's a link in the pin comment. Sure, you might have to share the new merc with them as a thank you, but I think they deserve a spin in the new whip after saving you that much in tax.
Now, strategy two, delay your dividends. Don't pay tax on money you don't need yet. Dividends are only taxed when you draw them. So, if you don't need the cash this tax year, leave it in the company. You still pay corporation tax on the profit, but you don't pay any personal tax until you actually distribute that money. For example, rather than take, let's say, um, 80,000 this year and lose 33.75% on 30K of it, you could take 50,270 this year and then another 50,270 next April. You stay in the basic rate band then both years and save over seven and a half thousand in personal tax. You're not avoiding tax, you're spreading it. And HMRC is completely fine with that.
And then strategy three, you can use your company to contribute to a pension. And this one's a gem, especially if you're in the 25% corporation tax band. Your company can make pension contributions directly on your behalf. And it's tax deductible to the business. So you save corporation tax. It's not classed as income. So you're avoiding income tax and NIC entirely. Even though it becomes income once you retire, it actually gets bigger tax-free inside your pension pot. You can usually contribute up to 60,000 per year, which is the annual allowance, or more than that if you've carried forward unused allowance from previous years. And because it's a company contribution, you're not limited by your salary. For high-profit companies, this is one of the cleanest ways to extract cash tax efficiently, build wealth for the future, and reduce corporation tax immediately. And the catch, you can't access the money until age 55, rising to 57 in 2028. But if you don't need the cash now, it's an absolute win.
But a word of caution, don't let tax efficiency starve your life. You deserve to live a little. Get that work life balance. We're all about optimizing your tax, but you shouldn't fall into a trap of being so efficient that you're cash poor and stressed without a single holiday under your belt and a fiat 500 to show for it. Sometimes it's worth taking a hit if it means paying off debt, investing in your family, or just blooming enjoying yourself.
So, you've got the salary strategy right, but here's what catches directors out all the time. You can follow all the right rules and still end up in trouble if you don't document things properly. So, here's a checklist of the stuff that's absolutely essential if you want to remain compliant and keep HMRC out of your hair.
Step one, make sure you've registered for PAYE. If you're paying yourself a salary, even just 12,570, you need to register as an employer with HMRC and run payroll through RTI, real-time information. Yeah, even if it's just you.
Step two, submit actual payslips and FPS reports. You can't just send yourself £1,047.50 a month and call it sorted. You need to have monthly payslips issued from compliance software, a full payment submission, FPS, sent to HMRC every time you pay yourself. If you're using Xero, FreeAgent, or QuickBooks, they handle this automatically. If you don't do this, it's not salary and you lose the state pension contributions. And I've spoken to somebody recently that thought he was fully paid up and he's now just found out he's actually got three years contributions that haven't been made because his accountant didn't actually file it as salary. Now he's got 2 1/2 grand to make up to get back some more money on his state pension.
Step three is declare dividends properly and create vouchers. Dividends must be declared by the company in board minutes. even if you're the only director. Backed by available post-tax profits and documented with a dividend voucher. All easy templates you can just repeat every month if you want to. You don't have to send this to HMRC, but you do need to keep the paperwork on file and include it in your self-assessment tax return.
Then step four, make sure you actually pay the tax. It seems obvious, but it's worth saying. Dividend tax isn't collected through PAYE. You'll owe it through self-assessment, which is due the 31st of January after the tax year ends. And if you cross the £1,000 tax mark, which you will if you're drawing 50K plus, HMRC will expect payments on account for the following year too. So, plan for it. Don't spend it.
Step five, cross-check with your accountant at year-end. Even if you've done everything by the book, the final check is worth it. Each year, review your salary and dividends. Confirm you stayed within thresholds. Check for new allowances or changes like the new NIC rates this year. Make sure you've claimed things like employment allowance if you're eligible. And if you've taken dividends, but your profit and loss doesn't back it up, that's a red flag. Fix it before filing.
See you next time.