How Much Should I Pay Myself This Tax Year?

Author: George Ian Hope BAcc(Hons), MSc(IT), FCCA, CGA, CPA
https://www.linkedin.com/in/gihope
Ian is a general practicing member of the Association of Chartered Certified Accountants with fellowship
status (FCCA). He is also a member of the Certified General Accountants Association of Canada (CGA),
and a member of Chartered Professional Accountants of Canada (CPA).

New Tax Year Has Started!

A new tax year started last weekend on the 6^th April 2025 and runs until the 5^th April 2026 next year!  Therefore, this is exactly the question we are encouraging all of our clients to ask themselves at this time of year: How much should I pay myself in the 2025 to 2026 Tax Year?

Indeed, we run a Tax Planning consultation process with each of our clients at this time every year.  And as part of this process we provide them with a tax calculator which incorporates the updated tax rates and allowances which were announced by the chancellor in the Autumn Budget, and where possible we also update this to include any further changes announced in the Spring Statement.  This allows our clients to experiment with and see the impact of paying themselves different levels of salaries and dividends from their limited companies.  It also works for Employees and Self-Employed Sole Traders by incorporating employment and self-employment income.  In addition to this useful tool, our clients have the opportunity to speak with one of our Accountants to discuss their specific circumstances.  And for those that require additional pension, life insurance, or wealth advice, we have a partnership agreement in place with Boolers to provide specialist advice in these areas.

This allows us to help each of our clients based on their personal circumstances, and gives them the opportunity to instruct us what salary they would like us to process on their behalf for the new tax year on a more informed and knowledgeable basis.

Autumn Budget – Significant Changes

Significant changes proposed by the Chancellor in the Autumn 2024 Budget, which impact the salary / dividend decision for the coming tax year include:

• From 6 April 2025, the rate of Employer’s National Insurance Contributions (NICs) will rise by 1.2 percentage points to 15%.
• The threshold earnings at which employers start to pay NICs on behalf of individual staff will decrease from £9,100 to £5,000 per year.
• The Government will increase the Employment Allowance from £5,000 to £10,500 and make it available to all eligible employers. Previously the allowance was not available to employers who pay more than £100k a year in Employers NIC.
• Personal tax thresholds – The personal allowance (the amount you can receive tax free each year), and the basic and higher-rate tax thresholds for income tax remain frozen until April 2028.

Other Key Information

Other key information which impacts the decision for typical taxpayers:

• Taxpayers (with the exception of those who earn more than £100k) start paying income tax when their salary exceeds the value of their Personal Allowance (£12,570). Where you earn more than £100k your personal allowance is reduced by £1 for every £2 of income in excess of this limit, so you start paying tax sooner.
• Employees start paying Employee’s National Insurance when their salary exceeds the Primary Threshold (£242 Weekly, or £12,570 Annually).
• Employers start paying Employer’s National Insurance when an employee’s salary exceeds the Secondary Threshold (£96 Weekly, or £5,000 Annually), unless they qualify for the Employment Allowance, in which case this will reduce the value of tax payable.
• Taxpayers start accruing National Insurance benefits (such as qualifying payments towards the State Pension) when their salary exceeds the Lower Earnings Limit (£125 Weekly, or £6,500 Annually).
• Eligible employers can use the Employer’s Allowance (£10,500) to offset the value of Employer’s National Insurance which is payable. There are strict eligibility criteria that apply in order to claim this, but typically you must have more than one employee earning above the Secondary Threshold (£96 Weekly, or £5,000 Annually).  So, businesses which have only a single Director (employee) are specifically excluded.
• Taxpayers start paying tax on dividends when their value exceeds the Dividend Allowance (£500).

What is the Most Tax Efficient Salary?

It always depends on your personal circumstances, but based on the above the most tax efficient salary for a typical taxpayer primarily depends on whether you employ more than one person (with salaries each in excess of £5k), and whether you need to pay yourself a salary which accrues National Insurance benefits and payments towards your State Pension.

For single Director businesses (who will not qualify for the Employment Allowance), a salary equivalent to the Secondary Threshold of £5,000 is therefore typically the most tax efficient.  However, we normally recommend setting a salary at least a nominal amount higher than the Lower Earnings Limit (e.g. £6,550 or higher) to safeguard qualification for state pension and associated other national insurance benefits.

For businesses with more than one employee and who satisfy the other eligibility criteria to qualify for the Employment Allowance, then a salary equivalent to the value of the Personal Allowance of £12,570 is typically the most tax efficient.

Although there can be exceptions to the above based on your specific circumstances, and your preferences with respect to the salaries you specifically want to pay your staff.

What if I am an Employee or a Self-Employed Sole Trader?

If you are an employee, and do not separately run another business or have any other sources of income then all of your employment income will normally already be subject to tax and national insurance under the PAYE system.   This means that your employer will collect the income tax and national insurance before they pay you your salary, and they will pay this over to HMRC on your behalf.  Altering your salary will not significantly change your tax situation, except to say that as you earn more money, you will be subject to more tax!

If you are self-employed, then the “profit” of your business will be subject to income tax and national insurance.  In order to determine the amount of tax you have to pay each year, you need to submit a self-assessment personal tax return.  And where the tax payable is typically more than £1000 then you will pay your taxes in installments: half in January (during the tax year), half in July (after the tax year), and anything left over the following January.  Note though that self-employed people are subject to tax on the “profit” or their business and not their full earnings.  This means that you are normally allowed to subtract the value of genuine business expenses from your earnings, before this reduced value is then taxed.

Can QAccounting Help Me?

Yes, we aim to be the UK’s Premier Online Accountancy and Tax Accountant, and we are here to help you every step of the way, whether you need to understand the rules in greater detail or need advice about next best steps.

Please give us a call (0116 243 7868), email (at enquiries@qaccounting.com), or contact us ONLINE to speak to a member of our Accounting team without delay!