Extracting money from your company 2025/26

Do you need a bespoke salary and dividend plan for 2025/2026?

The days have passed when the “house” salary and dividend (remuneration) strategy could be used as a solution for most straightforward clients, i.e. £12,570 plus dividends. The tax landscape is getting ever more complex and there are many considerations which we have set out in this blog.

It has become increasingly difficult to offer a one-size-fits-all house solution for directors of small businesses, as you must consider the implications of many different taxes, multiple thresholds, and significant non-tax implications that are often overlooked.

The income tax thresholds and rates have been held, which means directors will pay more income tax if they wish to increase their remuneration to keep up with inflation. We still have significant marginal tax rates at specific income rates, which they may want to avoid.

The new employer’s national insurance rate of 15% from April 2025 means that directors will now pay 15% on all salaries above £5,000 (down from £9,100). If the only person on the payroll is a director, then the company will not benefit from the employer allowance of £10,500 as it is ineligible. This means the employer’s national insurance contribution on a director’s salary of £12,570 will be increasing £479 to £1,136, which is a significant increase.

Getting the salary and dividend balance right for the director’s circumstances is important and can affect the amount and timing of the tax they pay. Directors may consider dropping their salaries to £5,000 to be under the threshold, but one consequence would be that they won’t be able to receive qualifying years for the state pension (assuming no other earned income) and depending on the number of qualifying state pension years this could be a key consideration. A company will also get less Corporation Tax relief, assuming they take more dividends instead, as dividends are taken after corporation tax is deducted.

Considerations when setting directors salary and dividend plan for 2025/2026

–          The cash they need to maintain their chosen lifestyle
–          The cash the business has available to pay them
–          Their qualifying years for state pension
–          Any other income
–         Their employer and personal pension contributions
–          Their Mortgage requirements
–          Do they receive child benefits?
–          Any other benefits in kind
–          The company’s Profit levels
–          Certainty of the company’s profits
–          The rate of corporation tax suffered
–          Number of people on the payroll
–          Research and development claims
–          Different Taxes are due at different times

 

We always recommend that you complete a personal financial plan with an independent financial adviser before you set your salary and dividend plan so we know what you need now and in the future before discussing tax and we are happy to have joint meetings with your financial advisor to achieve this in the most cost effective way for you.

People often tend to build plans around tax thresholds, which is the wrong approach and can lead to overdrawn director loan accounts or business cashflow issues and a plan that may only work in the short term.

Anyone wanting to optimise their income should consider bespoke Tax advice on the best salary strategy and spending time with a Tax specialist to craft a plan that works for them.

Please get in touch if you would like to find out more about completing a tax review with LHP

Portrait of Rachael Ball from LHP Accountants

Rachael Ball
LHP Accountants

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