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The recent minimum wage increase in the UK brings important implications for company directors in the 2025/26 financial year. Although traditionally associated with hourly employees, changes to wage thresholds impact how directors structure their salary and dividends.
Understanding these changes is crucial for maintaining compliance and maximising tax efficiency.
Here are seven key points directors should know about the minimum wage increase and its effect on director remuneration:
1. Updated Financial Thresholds for 2025/26
Several thresholds have changed significantly:
- Personal Tax Allowance: £12,570 per annum
- Employer National Insurance (Class 1) Threshold: £5,000 per annum
- Lower Earnings Limit (LEL): £6,500 per annum
- Employer NI Rate: Increased to 15%
- Employment Allowance: £10,500 per annum, per company
2. Impact of Reduced Employer NI Threshold
The Employer NI threshold has dropped from £9,100 to £5,000, meaning directors may face higher National Insurance Contributions (NICs) unless they manage their payroll carefully. This makes strategic tax planning even more essential.
3. Why Minimum Wage Matters for Directors
While many directors aren’t hourly workers, these threshold changes affect:
- Payroll structures
- National Insurance obligations
- State pension qualification
Directors who pay themselves through a limited company must adapt their compensation strategies accordingly.
4. Recommended Salary Strategies
Based on the new thresholds, here are three tax-efficient salary structures for directors:
Mix 1: £5,000 Annual Salary
- No income tax or National Insurance
- No qualification for state pension contributions
- Ideal for minimising NI obligations
Mix 2: £6,500 Annual Salary
- Above LEL, so it qualifies for state pension
- Minimal Employer NI (~£225 annually)
- Balanced approach
Mix 3: £12,570 Annual Salary
- Fully uses personal allowance
- Employer NI: ~£1,135.50/year (can be offset by tax savings)
- Best suited if your company qualifies for Employment Allowance
5. Eligibility for Employment Allowance
Companies are eligible if they have:
- Two or more directors, or
- At least one additional employee
This provides up to £10,500 in NIC relief, often eliminating Employer NIC costs.
6. Choosing the Right Salary Mix
| Company Structure | Recommended Salary | Annual NI Cost | Qualifies for Pension? |
|---|---|---|---|
| Sole Director (No Employees) | £6,500 | £225 | ✅ Yes |
| Sole Director (Very Low Profit) | £5,000 | £0 | ❌ No |
| 2+ Directors or Employees Present | £12,570 | £0 (via allowance) | ✅ Yes |
Directors should consider their employee count, profit margins, and personal goals when choosing a salary level.
7. Leveraging Corporation Tax Savings
While a £12,570 salary increases Employer NI, the corporation tax savings can outweigh this cost:
- At the current 19% rate, the increased salary expense lowers your tax bill
- Especially beneficial if you’re eligible for Employment Allowance
Conclusion
Adjusting your remuneration strategy in response to the 2025/26 minimum wage changes is vital. Consider:
- Balancing salary vs dividends
- Navigating the new NIC thresholds
- Making use of the Employment Allowance
This helps you remain compliant, financially efficient, and pension-qualified.
➡️ Need tailored advice? Consult a qualified accountant to optimise your setup under the new financial regulations.
If you require detailed assistance or bespoke guidance, consider contacting a professional accountant to ensure your remuneration strategy aligns effectively with the latest financial regulations.
