Mike Aitkin, Senior Client Manager at WR Partners—Bolesworth’s Accountants and Tax & Business Advisory Partner shares key strategies to help businesses optimise Directors’ Remuneration for the year ahead.

As the 2025/26 fiscal year approaches, business leaders must navigate the latest tax and remuneration changes to stay ahead. The Spring Budget has introduced both opportunities and challenges for directors looking to structure their pay efficiently. From balancing salary and dividends to maximising pension contributions and tax allowances, making informed decisions is crucial.

Optimizing Directors’ Remuneration for 2025/26

As we approach the 2025/26 tax year, directors of owner-managed businesses need to carefully plan their remuneration strategies to maximize tax efficiency. Here are the key considerations for salary, interest, and dividend extraction.

Salary

The tax free personal allowance is currently £12,570, a director’s salary is usually set below this amount at the threshold which no employer NIC (National insurance contributions) would be payable. However the current threshold of £9,100 is reducing to £5,000 from April 2025. A salary at this level, would be lower than the threshold to qualify for state benefits (such as state pension), which is currently £6,500.

In addition, the vast majority of employers are able to benefit from the employment allowance, apart for sole director or employee companies, this allowance is increasing from £5,000 to £10,500.  This increases the benefit of taking a higher salary up to £12,570 with no NIC for either the employee or the employer, and is also allowable for corporation tax purposes. This provides the optimal tax savings.

It could be sensible for a sole director company consider employing an additional employee to open up the employment allowance.

There are other circumstances which could mean a higher salary may be preferable such as the director looking to purchase a house in the near future, or where the company may benefit from R&D Tax relief, or where the director/spouse utilises tax-free childcare (requiring earnings of £10,159+).

Interest

For the current and incoming tax years, the personal savings allowance is available to utilise and allows £1,000 (basic rate tax payer) or £500 (higher rate taxpayer) of interest received to be tax free.

In addition, in a scenario where individuals receive only investment income in excess of personal allowance, this means that the first £5,000 worth of interest may be subject to a savings rate of 0%.

It could be beneficial to consider paying interest at a commercial rate on monies loaned to a company to utilise these allowances. The company would also benefit from the offset of interest against its taxable profits.

There however is a trade off with additional administrative burden for the requirement of interest payments and quarterly submissions of form CT61 to HMRC.

Dividends

The dividend tax free allowance has been reducing over recent tax years, however remains at £500 for the 2025/26 tax year. Currently the dividend tax rates are:

Dividends are the usual method for distributing profits to shareholders but require sufficient reserves available within the company. It is recommended to draft dividend paperwork and minutes to cover the declaration to shareholders.

We would recommend getting in touch to ensure you can benefit from the optimal remuneration from your company against the backdrop of increasing thresholds and taxes, considering all three options discussed above.