The tax & NI rules that affect your optimal salary 2025/26

In working out the optimal salary 2025/26, you’ll need to bear in mind the key thresholds for income tax and national insurance contributions (NICs):

• The personal allowance remains at £12,570 for the tax year 2025/26.

• Income tax rates (England & Wales) remain: 20% basic up to £50,270, 40% higher rate up to £125,140, and 45% additional rate beyond that.

• For employees (and directors treated as employees), the primary threshold for Class 1 NIC is £12,570 per year (equivalent to £242 per week) for 2025/26.

• For employers (i.e., the company paying the director salary), the secondary threshold (where employer’s Class 1 NIC becomes payable) falls to £5,000 per annum for 2025/26, and the employer rate rises to 15%.

• The Employment Allowance (which may reduce employer NIC liability) increases to £10,500 for 2025/26 and the £100,000 previous cap for eligibility is removed.

These changes mean that while the salary level required to qualify for pension credits (LEL) remains modest (about £6,500 per annum) the employer cost for paying a full salary close to the personal allowance has increased due to the higher employer NIC and lowered threshold.

What salary should you pay yourself (the optimal salary 2025/26)?

1. Basic guideline

If your company can afford it, paying a salary equal to the personal allowance (£12,570) remains an attractive benchmark — it fully uses your personal tax-free allowance, and under previous years you could do so with zero employee NIC. For 2025/26, the employee NIC primary threshold is also £12,570, so paying salary up to that amount means no primary NIC.

However, because of the employer NIC regime change, you must check the employer cost.

2. Pension-qualifying strategy

For many directors the real aim is to ensure you get a qualifying year for state pension and benefits. To do that you must be paid at least the LEL (lower earnings limit), which for 2025/26 is about £6,500 per annum.
Hence one “optimal salary 2025/26” strategy is:

• Pay yourself ~£6,500 (ensuring you hit the LEL)

• Extract further profits by dividend (if the company has retained profits)

• Accept the small employer NIC cost (15% on salary above £5,000)
  As illustrated in the companion article by Phillips & Co Accountants — they recommend the “pension-qualifying” salary of £6,500 for 2025/26.

3. Full personal allowance option

Alternatively if you want to maximise salary (for pension or other reasons) you could pay yourself up to £12,570. For many this remains the optimal salary 2025/26 in terms of taking advantage of your personal allowance; but you must factor the additional employer NIC cost which will be approx: (12,570 – 5,000) × 15% = ~£1,142.50.

In many cases the additional cost will make dividends a more efficient route for extracting profits beyond the “pension-qualifying” salary.

4. Tailoring to your circumstances

The above are general guidelines. The true optimal salary will depend on:

• Whether you have unused personal allowance (e.g., other employment)

• Whether the company can deduct the employer NIC and salary cost (saving corporation tax)

• Whether the company has retained profits to pay dividends

• Whether you personally need to maximise NI qualifying years (for pension)

• Whether you wish to minimise your employer NIC cost

Why dividends still matter

Once you have paid a salary at or near the optimal salary 2025/26 level, the remainder of profit extraction is often best achieved via dividends, provided that your company has sufficient retained profits. Dividends incur no employer NICs, and for shareholders often the tax rate is lower than salary income.

With salary set low, you retain maximum flexibility to pay dividends when convenient and efficient.

Things to watch in 2025/26

• The employer’s secondary threshold falling to £5,000 means that even relatively modest salaries now trigger employer NIC.

• The employee primary threshold remains £12,570, so salaries up to that level remain free of employee NIC — still a benefit.

• The personal allowance remains frozen at £12,570; because earnings inflation may push you into higher tax bands, planning remains vital.

• If you pay a salary higher than needed for pension-credit purposes just to utilise the personal allowance, you must check the employer NIC cost against what you would gain via dividends.