Understanding Profit Extraction for Owner-Managed Companies

The Employer NIC Changes from April 2025

Currently, employers pay Class 1 NIC at 13.8% on employee wages above £9,100 a year. From April 2025, that rate rises to 15%. The threshold at which employer contributions start falls from £9,100 to £5,000. For a director drawing a salary, this means employer NIC becomes payable earlier in the year and at a higher rate. This is a meaningful shift for a strategy that has traditionally relied on keeping salary just below the secondary threshold.

Factors That Shape the Most Tax-Efficient Approach

There is no single 'right' salary and dividend split. Working out the most efficient combination means weighing several factors together. Use actual numbers rather than rules of thumb:

• The dividend allowance

• The employee Class 1 National Insurance Contributions (NIC) rate

• The employer Class 1 NIC rate

• The corporation tax rate

• Pension contributions

• State pension entitlement

  
  

It is also worth remembering that the Employment Allowance, which can reduce an employer's NIC bill, is not available to companies where the director is the only employee paid above the secondary threshold. This rules out a saving that many single-director companies might otherwise expect to claim.

Options for Paying Yourself as a Director

Salary

A salary at or near the personal allowance tends to be efficient for many directors. It is deductible against corporation tax and can protect entitlement to the state pension, even though employer NIC now bites earlier. Whether it remains the most efficient starting point depends on the new, lower threshold and rate.

Dividends

Dividends are not subject to NIC at all. This keeps them attractive relative to salary above the NIC thresholds. However, dividends are paid from profits after corporation tax and are taxed at dividend rates once the dividend allowance is used up. Their advantage over salary can shift as corporation tax and NIC rates move independently of each other.

Pension Contributions

Employer pension contributions remain one of the more NIC-efficient ways to extract value from the company. They are generally a deductible business expense, and there is no employee or employer NIC on them. However, they do not provide accessible income now.

The Importance of Regular Review

Because salary, dividends, and pension contributions interact with each other's thresholds and allowances, the right mix is usually the result of running the actual numbers for your company and personal position each year. It is essential to avoid carrying over the same split from a previous tax year.

Conclusion

In summary, the changes to employer NIC from April 2025 will impact how directors extract profits from their companies. It is crucial to consider various factors, including salary, dividends, and pension contributions. Each option has its advantages and disadvantages. Regularly reviewing your approach will help ensure you make the most tax-efficient decisions for your business.

This article is for general information only and is not personal tax advice. The details of your company's performance, your other income, and your personal circumstances all affect the outcome. Speak to your accountant before setting your salary and dividend levels for the year ahead.