As mentioned in last month’s blog, April 2025 will witness significant changes to National Insurance Contributions, which will have a noticeable financial impact on many small businesses. But one group of people who are likely to feel that impact more than others are sole directors of limited companies.
Not only is the Employer NICs secondary threshold being reduced from £9,100 to £5,000, to make matters worse sole directors aren’t even eligible for Employment Allowance, which allows employers to reduce their annual National Insurance liability.
Paying yourself as a sole director will suddenly become more expensive, which will have an inevitably effect on your company’s cashflow and profits.
We take a look at what your options are.
What’s the best salary to take?
In the past, the most tax efficient approach for the majority of sole director companies was to opt for a low salary topped up with dividends. For example, in 2024/25 many took a salary of £9,100, which meant they didn’t need to pay any Employer NICs as it matched the NIC secondary threshold. But with the threshold dropping substantially in 2025/26 to £5,000 this may no longer be a suitable option.
So, what should you do? Well, below we have highlighted three different salary alternatives. Each includes an overview of what it means in terms of NICs, and whether you will get a qualifying year for your state pension.
In all cases, you won’t have to pay any personal tax as the salaries are below the Personal Tax Allowance threshold of £12,570 per year. This also means you won’t have to pay any employee NICs. Just bear in mind these scenarios are based on directors with no other income sources, such as from a pension or rental property.
Option 1: Salary of £5,000 per annum
If you don’t want to pay any National Insurance Contributions, pay yourself
£416.66 a month, which will match the secondary NIC threshold of £5,000. This means:
- You won’t have to pay Employer National Insurance Contributions
- You won’t have to pay Employee National Insurance Contributions
- You won’t achieve a qualifying year for your State Pension as your salary is below the Lower Earnings limit of £6,500
- You won’t have to pay any personal tax.
Option 2: Salary of £6,500 per annum
If you pay yourself £541.66 per month, then your annual salary will match that of the Lower Earnings Limit. This makes it a good option for those who want a qualifying year for state pension but want to pay as little National Insurance as possible.
- You will have a small Employer National Insurance Contribution of £225
- You won’t have to pay Employee National Insurance Contributions
- You will receive a qualifying year for your State Pension
- You won’t have to pay any personal tax.
Option 3: Salary of £12,570 per annum
Unlike dividends, salaries are classed as a tax-deductible expense, which means they reduce the amount of profit and therefore the amount of Corporation Tax you company will have to pay. So, if you are interested in the most tax efficient option which also reduces your Corporation Tax bill, pay yourself a salary of £1,047.50 per month.
This means:
- You will have an Employer National Insurance Contribution of £1,135.50
- You won’t have to pay Employee National Insurance Contributions
- You will receive a qualifying year for your State Pension
- You won’t have to pay any personal tax
- The additional NIC liability will be offset by Corporation Tax savings.
In each of these cases, the rest of your income can be topped up through dividend payments. And while dividends over £500 are taxable, they are normally at a lower rate than personal income tax.
Every situation is different so it’s important to look at your own personal situation, priorities and the position of your business, before you make any decisions on how you’re going to pay yourself.
We also recommend checking your State Pensions forecast, as that will help you decide whether you can afford to miss a qualifying year or not.
Is it worth hiring someone else?
If you put someone else on the payroll, then you will be eligible for Employment Allowance, which is increasing to £10,500 in April. This will help reduce your overall National Insurance liability. So, if you have a partner who often helps you out, or use a regular freelancer, it’s worth considering adding them as an employee. Just remember, they must earn above the secondary NI threshold of £5,000 for your company to qualify for Employment Allowance.
Read more on single-director companies and Employment Allowance.
Need more advice?
When you’re busy running a small business, it can feel a bit overwhelming to try and get your head around all the imminent tax changes along with all the other things you are juggling. But hopefully, we’ve managed to give you an insight into how you should pay yourself.
If you need any further help or advice, especially if you have another income or are thinking of adding someone to your payroll, please get in touch. We’ll be delighted to provide you with the advice you need.
