2025/26 Payroll & PAYE Tax Efficiencies

With the 2025/26 tax year looming and the greatest changes to Pay As You Earn (PAYE) seen in a number of years, PJCO has put together this handy guide to help you and your company achieve the most tax efficient salary solutions.

Director Only Payroll (One Director)

If you are a single director on your company’s payroll, the recommended salary is £12,570 per annum, or £1047.50 a month. This will ensure you fully utilise the typical tax-free allowance and ensure you make a credit against your state pension record.

The negative of this is Employer’s National Insurance, and because the threshold is being reduced and the percentage increased at the conclusion of the 2025/26 tax year your company will be required to pay £1,135.50 to HMRC for PAYE.

Tax Efficient Solution:

 As a single director on the payroll you are not eligible for Employment Allowance (EA), however by adding your partner, child (21 years old+), parent etc. on a salary of between £417 to £833 you can claim Employment Allowance which will write off the £1,135.50 in Employer’s NI and the funds can stay with your company.

Director Only Payroll (Low Income Company)

If you are a single director on your company’s payroll and the company has low income, the recommended salary is £6,504 per annum, or £542 a month. This will ensure you make a credit against your state pension record.

The negative of this is Employer’s National Insurance, and because the threshold is being reduced and the percentage increased at the conclusion of the 2025/26 tax year your company will be required to pay £225.60 to HMRC for PAYE.

Tax Efficient Solution: 

As a single director on the payroll you are not eligible for Employment Allowance (EA), however by adding your partner, child (21 years old+), parent etc. on a salary of between £417 to £833 you can claim Employment Allowance which will write off the £225.60 in Employer’s NI and the funds can stay with your company.

Company Pension Schemes

With a typical company pension scheme an Employee’s Pension Contribution is deducted from their net pay meaning that their gross pay is subject to the typical Income Tax, Employee’s National Insurance and Student Loan deductions and the company pays Employer’s National Insurance on their full gross pay too.

Tax Efficient Solution: 

You may want to consider converting your employees to a salary sacrifice arrangement, with this their Employee’s Pension Contribution is deducted from their gross pay, they pay less Income Tax, Employee’s National Insurance and Student Loan and receive greater take home pay too! The company also pays less Employer’s National Insurance, and these savings can either be retained by the company or passed onto employees as additional pension contributions.

Whilst this is a great solution, there are cons for employers and employees alike to be aware of such as consultation processes (link), and the impact of mortgages, Statutory Maternity Pay (SMP) etc. (link). However, if your company has a significant amount of employees and/or large salaries it would be worth considering.

If you would like any further assistance or advice with payroll, PAYE or company pension schemes we at PJCO would love to help you.

Information correct as of the 13th of January 2025.

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