Optimal 2025/26 salary for contractor companies
Written by Ray Coman
The reduction in the secondary threshold from £9,100 to £5,000, from 6 April 2025 has had an impact of contractor companies. Most companies that are set up for the purpose of providing services for the self-employed consist of just one director. A company with one director will not entitled to the employment allowance.
Husband wife or multiple director companies
Paying employees over £5,000 to preserve employment allowance
Changes from 2025/26
For contractor companies consisting of only one director, the reduction in employment allowance means that a further £4,100 of director’s salary is subject to national insurance. According to the calculation, illustrated I the table below a salary of £12,570 is still optimal. It requires a separate payment of tax through PAYE which introduces a minor administrative burden. The lower earnings threshold has stay about the same level of the preceding year. The level of £6,500 for 2025/26 is the earnings at which social security benefits accrue. Significantly, enring of £6,500 or higher in 2025/26 add a year toward the number required to secure a basic state pension.
Husband wife or multiple director companies
The employment allowance is not sacrificed where more than one person is a director even if the company consists only of directors. The most common form of multiple director contractor company occurs where husband and wife are both directors. The requirement is that one director is not the only person liable to employer’s national insurance (but for the employment allowance.) Therefore, if there are only two directors (for instance a married couple) and both are paid over the second national insurance threshold; the company will be eligible for employment allowance.
Paying employees over £5,000 to preserve employment allowance
It is also worth noting that if the company has employees (who are not directors) at least one of the employees would have to earn over the secondary threshold of the employment allowance to be restored. There is therefore an tax incentive to pay an employee at least this amount.
Scenario calculation
With the employer's national insurance Income tax is payable on almost all forms income with exception of tax free income
|
Rate |
Optimal |
Preserve state pension |
No PAYE payment |
| Profits |
£50,000 |
£50,000 |
£50,000 |
|
Salary |
£12,570 |
£6,500 |
£5,000 |
|
Employer's NI |
£1,136 |
£225 |
£0 |
|
Taxable profits |
£36,294 |
£43,275 |
£45,000 |
| Corporation tax |
£6,896 |
£8,222 |
£8,550 |
|
Dividend |
£29,398 |
£35,053 |
£36,450 |
| Non taxable dividend |
£500 |
£6,570 |
£8,070 |
| Dividends taxed at 8.75% |
£28,898 |
£28,483 |
£28,380 |
| Income tax |
£2,529 |
£2,492 |
£2,483 |
| Total burden of taxation |
£10,561 |
£10,939 |
£11,033 |
Our service
At Coman&Co the director’s salary is processed as a March bonus. This reduces the number of PAYE payments throughout the year to just one and thereby reduces the hassle associated with the optimal salary and dividend for a contractor company. We have lengthy experience providing compliance service to small business and self-employed individuals including the many that choose to operate via limited company. We provide a full support service and ensure that it is adjusted according to changing rules to maintain tax efficiency for our clients. Please contact us for a free, initial meeting
