As we enter the 2025/26 tax year, single-director companies need to be aware of changes to National Insurance Contributions (NICs) and how to navigate them effectively. Without employees, directors must carefully plan their remuneration strategy to minimise unnecessary tax burdens while remaining compliant with HMRC rules..
Changes to National Insurance for 2025/26
- Increase in Employer NICs – The employer’s NIC rate rises from 13.8% to 15%, increasing the cost of paying a salary above the NIC threshold.
- Lower Secondary Threshold – Employer NICs will now start at £5,000 per year instead of £9,100, meaning more salary will be subject to NICs.
- Employment Allowance Remains Unavailable – As a single-director company with no employees, you cannot claim the Employment Allowance to reduce NICs.
Reduction in Employee NICs – The main rate of Class 1 NICs for employees (including directors) drops from 10% to 8%, offering a small benefit.
What is the Optimum Salary for 2025/26?
For a single-director limited company, the most tax-efficient salary depends on whether your company is eligible for the Employment Allowance. Since single-director companies do not qualify, the optimal salary strategy is:
- £12,570 per year – This aligns with the personal allowance and avoids income tax while keeping NIC costs low.
- Employer NICs would be payable on earnings above £5,000. There will be a noticeable increase in National Insurance contributions, costing an extra £656.64 over the tax year. However, it remains the most tax efficient level overall.
- Employee NICs apply above £12,570, but with the reduced rate of 8%, the impact is lower than in previous years.
- Any additional income should be taken as dividends, which remain more tax-efficient than a higher salary.
Alternatively, if you want to completely avoid NICs, you can keep your salary at £5,000 per year and take more income through dividends. However, this means you won’t fully utilise your tax-free personal allowance and the year will not count towards your future state pension entitlement.
How to Mitigate the NIC Increase
If you operate as a single-director limited company, consider these strategies to reduce your NIC liability while remaining tax-efficient:
- Use Tax-Efficient Benefits: Since you can’t claim the Employment Allowance, consider benefits that are NIC-exempt:
- Employer Pension Contributions – Your company can pay directly into a pension scheme instead of paying a higher salary.
- Company Mobile Phone – A mobile phone provided by the company is tax-free.
- Trivial Benefits – Gifts under £50 (such as store vouchers) can be given tax-free.
- Consider a Salary Sacrifice Scheme: For larger tax savings, you could use salary sacrifice to contribute more to a pension, effectively reducing your NICable salary while saving for retirement.
- Plan Your Dividends Wisely: Dividends remain a tax-efficient way to extract profits, but with recent tax changes, it’s crucial to balance your salary and dividends properly to minimise your tax bill. Planning ahead ensures you stay within the most tax-efficient thresholds.
- Stay Compliant with IR35: If you work as a contractor, ensure your payment structure remains compliant with IR35 rules, as HMRC closely monitors disguised salary arrangements.
Conclusion
The 2025/26 tax changes place a higher NIC burden on company directors, but with smart planning, you can minimise the impact. The optimal salary for a single-director company is typically £12,570 per year to make full use of the personal allowance, or £5,000 if you want to avoid NICs entirely. By strategically using dividends and tax-efficient benefits, you can ensure your business remains financially optimised.
Still Have Questions? We’re Here to Help!
At Guida Accountancy, we specialise in helping small business owners and single-director companies navigate tax changes and optimise their financial strategies. Get in touch for personalised advice tailored to your business.
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