Tax Update: Remuneration Planning 2025

A shareholder/director of an owner managed business could receive up to £19,070 tax free in both the 2024/25 and 2025/26 tax years if structured appropriately, depending on the individual’s circumstances and other income. This can be achieved through a combination of low salary, high interest and dividends and could equate to tax free income of up to £38,140 for couples.

Salary

The personal allowance is currently £12,570 and is expected to be frozen at this level until April 2028.  A director’s annual salary is often set below this amount, at the threshold at which no employer’s national insurance contributions (NIC) will be payable, however, the threshold of £9,100 for 2024/25 is reducing to £5,000 from April 2025. This will then be lower than the threshold at which an individual will qualify for state benefits, which is £6,500 from April 2025.  As such, and to ensure that the individual receives their ‘NI stamp’ for the tax year, a minimum basic salary of £6,500 is likely to be more advisable, albeit that employer’s NIC of £225 will be incurred as a result.

In some cases, however, the individual may benefit from taking a higher salary, for example where the company may also be able to utilise the employment allowance, which is increasing on 6 April 2025 from £5,000 to £10,500. From April 2025, nearly all employers (except companies with a sole director/employee) will be able to access the allowance. This could increase the benefit of taking a higher salary up to the personal allowance with no employer’s or employee’s NIC liability, as well as a deduction for corporation tax (versus dividends which are not tax deductible).

As mentioned, each individual’s circumstances need to be carefully considered, but some other examples in which a higher salary or bonus should be considered include where:

• the company is eligible for R&D tax relief and a proportion of the director’s salary costs could potentially be claimed for enhanced relief;
• the individual is an employee of the company on a higher base salary that also holds some shares in the company (or has other non-savings income);
• the director/their spouse utilises tax-free childcare as they will each need to have a minimum income of £10,159 for 2025/26 to qualify (with dividends being excluded from income for these purposes); or
• there are other commercial reasons, such as the director is looking to purchase a house in the near future. Not all mortgage lenders may take into account dividends and therefore they may have a wider choice of lenders if receiving a higher salary.

Interest

For 2024/25 and 2025/26, the personal savings allowance is still available which means that the first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) of interest received will be tax free in each year.

In addition to this, for individuals who receive only investment income in excess of the personal allowance (£12,570), the first £5,000 of interest will be subject to the starting savings rate of 0%.

If an individual does not currently receive enough interest from other sources and has loaned money to the company, you may want to consider paying interest at a commercial rate on the loan to fully utilise these allowances. Furthermore, as interest is deductible for corporation tax purposes, interest on a director’s loan account should be paid in preference to dividends, as the net position will be preferential.

One point to note is that the company would need to deduct basic rate tax from the interest payments and submit a form CT61 to HMRC.

Dividends

The dividend rates for both 2024/25 and 2025/26 are:

A tax-free dividend allowance of £500 is available in each tax year with any additional dividends taxed as the top-slice of income, so the tax bands that dividends fall within will be affected by other income. If total income exceeds £100,000 the personal allowance is restricted by £1 for every £2 of income above £100,000.

Payment of dividends is a standard way for a company to distribute its profits amongst its shareholders but there are a number of rules which apply to the payment of dividends which need to be considered, including having sufficient reserves within the company.

In addition to the above, and with the standard rate of corporation tax at 25%, in some cases it may now be more tax efficient for directors to be remunerated by full salary and only utilising the dividend allowance rather than taking a small salary, typically where total remuneration is significant (i.e. in excess of £500,000).

Please get in touch if you would like any further information on the above.