Directors' Payroll: Optimal Salary Strategy 2025

Owner-directors of limited companies have flexibility in how they draw income — a combination of salary and dividends is the standard approach for tax efficiency. The optimal salary level for 2025/26 is generally around the NI secondary threshold (£5,000) or the personal allowance (£12,570), depending on the director's other income sources and whether the Employment Allowance is available.

A salary at the NI secondary threshold means no employer or employee NI is payable, a qualifying year for State Pension is secured (if the salary is above the lower earnings limit of £6,396), and the salary is a deductible business expense. Dividends are then drawn on top of salary from the company's post-tax profits, taxed at dividend rates rather than income tax rates.

The specific optimal point changes each tax year as thresholds and rates change. The April 2025 changes — the drop in the NI secondary threshold and the rate increase — affect the calculation for directors who previously set salary at the old secondary threshold. Mellow calculates directors' payroll the same way as employee payroll. If you use Mellow and also use an accountant to advise on salary strategy, the accountant can advise on the right level and you set it in Mellow's payroll configuration.