Owner-managed Businesses - changes in remuneration from April 2025

For owner-managed businesses, remuneration should be considered each year. As we approach the start of the 2025-26 tax year, we take a look at the key changes affecting remuneration from April 2025.

Our main recommendations

• A small salary with the remainder of income as dividends is generally the most efficient remuneration method, unless you are a big earner, or invest in R&D.
• For those drawing a salary, we recommend this being £12,570 per annum*.
• Individuals should consider utilising all of their yearly tax-free allowances (i.e. the dividend allowance and the savings allowance).

*Everyone’s circumstances are different; therefore, we recommend that you speak to us first before you decide to alter the level of your salary.

Is it better to take a salary or dividends?

Including a higher gross salary can help maintain the same take home pay for individuals, while the Corporation Tax relief will result in a lower cost to the company.

There are some scenarios where salary is now a more cost-effective remuneration method for the company than dividends.

However, there is still a benefit in choosing dividends over salary in the lower tax bands, which means there would need to be significant earnings (approximately £720k) to unwind the initial benefit in the lower rate bands unless there is an investment in R&D involved.

Changes to Employer National Insurance Contributions (NIC)

In the Autumn 2024 budget, the government announced the following changes to come into effect from April 2025:

• The threshold at which employers pay NIC’s is to decrease from £9,100 to £5,000. This threshold is per employee and is based on yearly salary.
• The employer NIC’s rate is to increase from 13.8% to 15%.
• The Employment Allowance will increase from £5,000 to £10,500. For eligible businesses, this allowance exempts the first £5,000 of employer NIC’s (First £10,500 of employer NIC’s from April 2025).
• The £100,000 Employment Allowance eligibility threshold is to be removed.

From April 2025, employers could find that their total NIC liability increases. Remuneration plans are important, now more than ever, to see whether there are ways of minimising this increased cost to businesses.

As a director, should you lower your salary?

Due to the employer NIC threshold changes, we have reviewed what the impact would be if directors were paid a lower salary of £5,000 instead of £12,570 from their business and then issued themselves with a higher yearly dividend in order to maintain a similar level of take home pay.

Whilst an individuals take home pay wouldn’t change, the company would only receive tax relief on paying a £5,000 salary instead of £12,570, even if it would benefit from having a lower employer NIC liability. We therefore recommend business owners, who remunerate themselves through a combination of a small salary and dividends, opt for the £12,570 salary rather than reducing to £5,000.

Dividend Allowance

The tax-free dividend allowance remains at £500 for the tax year ended 5 April 2026.

If you don’t already have dividend income, it could be worth considering a small yearly dividend from your company to utilise this allowance.

 

Pensions Annual Allowances

The Annual Allowance, which is the amount you can contribute into a pension without incurring a pension tax charge is £60,000. It is also worth noting the Annual Allowance is tapered for high earners with income in excess of £260k, and the £60k is reduced by £1 for every £2 above this to a minimum of £10k. Employer pension contributions are tax effective, as they are a tax-free benefit provided to an employee but the employer receives relief from Corporation Tax on the value contributed.

You may want to consider this further if you are not already making employer pension contributions and you would like to increase the value of your pension for retirement.

There are other implications to consider when making pension contributions, therefore we recommend you first speak to a financial adviser.

Speak to us about your remuneration plans

This guide contains general recommendations, which may not apply to every business and its owners. If you have any queries about the most efficient way to remunerate yourself, we encourage you to get in touch with our team for advice that is tailored to you and your situation.