Prior to the Chancellor’s Budget, we considered what any changes might mean for your existing profit extraction strategies.
Now, following the latest fiscal event, we revisit the same question and consider “what is the most tax efficient salary choice going forward?”.
Key tax rates and allowances for 2025/26
Directors have the ability to draw income from a business in several ways, including through the extraction of profits from the business, which can create significant opportunities to manage tax liabilities.
Here is what directors in England, Wales, and Northern Ireland need to keep in mind for the new tax year starting 6 April 2025:
- Personal Allowance: Stays frozen at £12,570 until April 2028.
- Dividend Allowance: Remains at £500, so anything above this will be taxed.
- Basic Rate Threshold: Frozen at £50,270.
- Additional Rate Threshold: Frozen at £125,140.
These frozen thresholds require you to plan strategically to make the most of your allowances and minimise tax liabilities.
Why you should consider combining salary and dividends
A combination of a small salary and dividends can be one of the most tax-efficient ways for directors to draw income, reducing tax and National Insurance liabilities.
A salary lowers your company’s taxable profits, while dividends are not liable for National Insurance Contributions (NICs), making them cost-effective.
Paying a salary above the NIC threshold also ensures your contributions count towards the state pension, helping with long-term financial planning.
It is worth bearing in mind that your ability to withdraw a dividend from the business can be impacted by overall profitability.
In many cases, if there are no profits then a dividend cannot be paid. However, if your business is loss making but holds reserves on the balance sheet from previous years, you are still entitled to extract dividends.
Choosing the best option
The best approach depends on your company’s setup and your financial goals, as there is no one-size-fits-all solution.
With a number of complex elements to consider, knowing how to structure your remuneration in the most effective way can be difficult, which is why we would always advise you to engage with an accountant on this matter.
We can help you look at the options available to you, the pros and cons of each, and ultimately ensure you are able to extract funds from your business tax-efficiently.
Speak with our expert accountants to review your circumstances and tailor a strategy that works best for you.
