As a business owner and director, deciding on your salary is a crucial task that needs revisiting annually. While this decision can impact your personal income, tax obligations, and company finances, it also requires careful consideration to ensure compliance with tax legislation, including the Managed Service Company (MSC) legislation.
At Companion Accountancy, we understand the complexities of setting directors’ salaries while adhering to legal frameworks. This guide will help you navigate the process for the 2025/2026 tax year, ensuring the decision remains firmly in your hands while keeping your business compliant.
What is MSC Legislation and why does it matter?
The MSC legislation was introduced to prevent individuals from using third-party arrangements to disguise employment as self-employment, thereby avoiding PAYE (Pay As You Earn) and National Insurance Contributions (NICs).
Under MSC rules, an accountancy practice like ours can provide guidance and support, but the final decision on salary must always rest with you, the director. This distinction safeguards you from penalties and ensures that your business operates within HMRC regulations.
Factors to consider when determining your salary
- National Insurance Contributions (NICs)
For 2025/2026, Employer NICs are set to increase from 13.8% to 15%. Directors should balance their salary level to optimise tax efficiency while accounting for this additional cost.
- Personal allowance
The personal tax-free allowance for 2025/2026 remains at £12,570. Setting your salary at or slightly above this threshold can help you maximise tax efficiency.
- Dividend allowance
Many directors supplement their salary with dividends. For 2025/2026, the dividend tax free allowance is reduced to £500, so it’s essential to factor this into your overall remuneration strategy.
- Pension contributions
Contributing to a director’s pension is a tax-efficient way to save for the future. Consider incorporating pension contributions into your salary strategy to reduce corporation tax liabilities. Speak to one of our recommended third parties to discuss this in more detail >> Partners Page <<
- Business cash flow
While tax efficiency is important, directors must ensure their salary decisions align with the company’s cash flow and operational needs.
Steps to determine your salary for 2025/2026
- Consult your financial forecasts
Review your company’s projected profits, expenses, and cash flow for the upcoming year. This will help you understand what the business can afford while maintaining stability.
- Set a salary within legal guidelines
Ensure your salary meets at least the National Minimum Wage (if applicable) or is aligned with your role as a director. A low or no salary approach may raise red flags with HMRC.
- Evaluate the optimal split between salary and dividends
Work with your accountant to determine the most tax-efficient combination of salary and dividends, taking the new dividend allowance into account.
- Document your decision
Record your decision in board minutes, demonstrating that the final choice was made by you, the director. This is critical for MSC compliance.
- Consider your personal savings
If you recognise that you are not able to set aside tax for your personal tax liability consistently, a higher salary where tax is deducted at source may be a better option for you.
- Seek professional advice
Complex tax regulations mean it’s always beneficial to consult a trusted accountancy practice, like Companion Accountancy, to ensure compliance and maximise tax efficiency.
Paying family members
If your spouse, children, or other family members are involved in your business, paying them a salary can be a tax-efficient way to share income and reduce corporation tax.
By paying family members for their contributions, you can take advantage of their personal tax-free allowances and lower tax brackets, potentially reducing the overall tax liability for your household.
The salary must be proportionate to the actual work performed. Overstating their pay could raise red flags with HMRC and be classified as tax avoidance.
Ensure you:
- Set a fair wage: Pay an amount that reflects their role and responsibilities.
- Keep accurate records: Maintain timesheets, job descriptions, and evidence of work to justify the payments.
Refer to our guide on “Should I give my partner shares in the company?” for more information.
How Companion Accountancy can support you
At Companion Accountancy, we provide tailored advice to help you navigate salary decisions while remaining compliant with MSC legislation.
Our services include:
- Salary and dividend planning: Helping you balance tax efficiency and company affordability.
- Pension contribution strategies: Maximising tax relief while building your retirement fund via our partnerships.
- Cash flow management: Ensuring your business remains financially stable throughout the year.
- MSC compliance support: Offering guidance without overstepping, ensuring the decision remains with you.
Key deadlines and updates
As you plan your salary for 2025/2026, keep the following in mind:
- Tax year start: 6th April 2025
- Employer NIC increase: Effective from April 2025
- Dividend allowance reduction: £500 from April 2025
By addressing these updates early, you can make informed decisions that benefit both you and your business.
Make informed decisions with Companion Accountancy
Setting your salary as a director is a decision that impacts your business’s financial health and your personal tax obligations. With Companion Accountancy, you can feel confident that your remuneration strategy is optimised for 2025/2026 while adhering to MSC legislation.
Contact us today to discuss your salary and dividend strategy or complete the payroll questionnaire if you know what salary you will be taking. Together, we’ll ensure you make the best decisions for your business and personal finances.
