With changes to employer’s National Insurance and the Employment Allowance, now is the time for businesses to review the most tax efficient mix of salary and dividends for directors.
From 6 April 2025 the secondary Class 1 National Insurance threshold reduces from £9,100 to £5,000. At the same time the rate of employer’s National Insurance Contributions (NIC) rises from 13.8% to 15%.
Cushioning the impact for some smaller employers the Employment Allowance (EA), previously up to £5,000 per year, more than doubles to a maximum of £10,500. The restriction that applies to the EA where employers have incurred a secondary Class 1 NIC liability of more than £100,000 in the tax year immediately prior to the year of the claim will be removed.
These two changes have the potential to significantly alter any existing calculations on the optimal remuneration structure for directors. In some cases it is more tax efficient to keep your salary as low as possible and take the rest as dividends due to the lower tax rates on dividends. However, following the increase to the EA, a director whose salary is eligible for the allowance and who has no other sources of income could, in certain circumstances, enjoy substantial tax savings by taking well over the personal allowance (£12,570) in salary.
The optimal mix will depend on various factors and differ from business to business. There may be other considerations such as ensuring that the amount paid to directors will be sufficient to cover any planned pension contributions. We can help you decide on the most tax efficient amounts of salary and dividends to pay yourself from your business.
