The Contract Eye team has updated the numbers for the 2025/26 tax year.
“As a company director, withdrawing a low salary topped up with dividends is the most tax-efficient way of taking money from your business – provided of course that you are operating outside IR35.
“For 2025-26, the tax-free personal allowance for most people stands at £12,570, but it is possible to draw a salary of as little as £6,500 and still qualify for the state pension.
“The most tax-efficient salary to draw will, therefore, depend on your circumstances (such as whether you have any other income) but will typically be between these two figures.
“You should also think very carefully about how much money you want to withdraw, especially if you need to demonstrate an income when applying for a loan or mortgage.
“Some lenders will include dividend income when establishing how much you can borrow, but this is not always the case. Therefore, it is always worth doing your research so you are able to make a well-informed decision.”
What factors affect the optimum salary?
Can your company claim the Employment Allowance? This incentive cancels out up to £10,500 of Employers’ NIC costs. Unfortunately, most small companies are excluded from this incentive.
Have you already earned income from a previous role during the current tax year?
Remember that the personal tax year runs from 6th April to the 5th April the following year.
What are the current income tax thresholds? For example, the personal allowance is £12,570 this tax year. You don’t pay any income tax on a salary below this threshold.
What are the current Employees’ and Employers’ National Insurance thresholds?
Do you want to ensure you get a credit towards your State Pension entitlement? You will need to make sure your salary is higher than the NI Lower Earnings Limit (£6,500).
Do you have a contract of employment with your company? It may state that you must pay directors and/or employees a minimum salary.
It is worth paying yourself a salary, as you save a minimum 19% Corporation Tax on this amount, which would otherwise be taxed as company profit.
Your company’s savings will be higher if its annual profits exceed £50,000 as the CT tax rates increased in April 2023.
The optimum salary for contractors in 2025/6 is £12,570. Find out more here.
Why can’t my accountant tell me what salary to choose?
If you have an accountant, they will typically only provide rough guidance when you set your salary for the current tax year.
