As in previous years, we’ve set out what we believe to be the most efficient salary for contractors and freelancers. The below are suggestions for the 25/26 tax year (starting from 6th April 2025) and engagements that fall outside IR35.
The ‘Most Common’ Situation
Generally speaking, and despite the changes in NI thresholds, in 2025/26 we recommend a salary of £1,047/month (as per 24/25). It is the maximum before employee NIC become payable, yet it is still sufficient in contributing towards the basic State Pension. The recommended amount, however, will attract employer NI, unless this is covered by the Employment Allowance (see more below).
HMRC will expect you to make employers’ PAYE payments a few times per year. Whilst paying this will be a small extra hassle, as a Maslins client, we will be in touch to remind you to make payment before the due date.
Based on the salary mentioned above (£12,564 for the year) and no other personal income, you can take dividends of:
- £506 and suffer no personal tax (0%)
- £37,706 (i.e. an extra £37,200) and suffer £3,255 personal tax (£37,200 at 8.75%)
- £87,436 (i.e. an extra £49,730) and suffer £20,038.88 personal tax (the above £3,255, plus £49,730 at 33.75%)
The above thresholds are not hard limits, just the levels above which the marginal rate of tax increases (i.e. the amount of tax suffered on each extra £ of dividends taken). The effective tax rate becomes increasingly penal on total earnings above £100k, at which point you will start to lose your personal allowance.
Whilst there will be instances where bespoke salary amounts for two-employee businesses would be more efficient, we will stick with the recommended monthly amount of £1,047 each. However, if your company profits are £150k+ for both the previous and coming 12 months, please get in touch and we’ll be able to advise further.
Other changes and useful information
Employment Allowance – companies with 2+ staff won’t have any employer NICs to pay, as they will qualify for the Employment Allowance. Effectively, if your company has 2+ staff, the first £10,500 of employer NICs will be covered by the allowance.
Student Loan/High Income Child Benefit Charge – these aren’t really exceptions as such, but factors to be aware of that can increase what you must pay.
If you have an outstanding student loan or claim Child Benefit, and your total overall income is above the thresholds, then there will be additional charges in respect of loan repayments and/or having Child Benefit clawed back.
For the High Income Child Benefit Charge, the lower threshold is £60,000, whereas for student loans it depends on the plan:
- Plan 1 – £26,065 (9% on earnings above this)
- Plan 2 – £28,470 (9% on earnings above this)
- Plan 4 – £32,745 (9% on earnings above this)
- Postgraduate Loan – £21,000 (6% on earnings above this)
Income Thresholds: No Need to Panic
The general logic isn’t surprising. In most situations, as personal income goes up, the tax rate goes up.
Also, don’t be concerned about possibly dribbling just above a threshold. For example, if you went £10 into the higher rate band, it just means that the top £10 of your income would suffer 33.75% tax instead of 8.75% on your dividends. There’s no sudden sting for going pennies above a threshold.
