Tax Opportunities for Small UK Companies & Start-Ups (2025/26)

Director‑owners of companies have an advantage that employees and most other executives do not. They can choose how and when income is taken so that HMRC’s combined income tax, corporation tax and National Insurance take is minimised.

For detailed PAYE and salary threshold guidance for director-owners, see our specialist guide:
Taxation and PAYE for Director-Owners (2025/26).

Director‑owners can decide:

• When they are paid and how they are paid;
• Whether profits stay in the company or are taken out;
• Whether a spouse or civil partner is employed by the company or shares in the profits so that additional allowances can be utilised by the household; and
• Whether value is taken as salary, dividends or pension contributions.

The 2024 Autumn Budget created new tax and National Insurance saving opportunities for newly formed and very small companies.

Important: This article contains general commentary on UK tax legislation affecting director-owners. A note on statutory conditions, anti-avoidance provisions and reliance appears at the end of this article.

The 2024 Autumn Budget – what this means in practice for one-person companies

The 2024 Autumn Budget introduced three changes that directly affect newly formed and very small companies.

For 2025/26:

• the Employment Allowance increased from £5,000 to £10,500;
• the employer National Insurance Secondary Threshold fell from £9,100 to £5,000 per year; and
• the National Living Wage increased from £10.42 to £11.44 per hour.

What this means in practice

Taken together, these changes make the Employment Allowance (EA) easier for very small and newly formed companies to access. Employer National Insurance now starts at £5,000, and at current minimum wage rates that level of pay represents only a few hours of work each week.

A company owner can therefore employ a spouse or civil partner for a small number of weekly hours and trigger the Employment Allowance. The allowance provides 100% relief from employer National Insurance up to a maximum of £10,500.

Employer National Insurance is charged at 15% on salaries above £5,000. A single director taking a salary of £75,000 generates £10,500 of employer National Insurance (15% × (£75,000 − £5,000) = £10,500).

The Employment Allowance removes the £10,500 ER’S NI charge arising on that salary of £75,000 cost in full. If the only other employee is the director’s spouse or civil partner paid slightly above the Secondary Threshold, no significant Employer’s National Insurance arises on that employee, leaving the full allowance available against the director’s salary.

In practical terms, what would otherwise be a 15% charge can be reduced to zero, up to the £10,500 limit, in a qualifying one-director company.

Key implications in practice

• The reduction of the Secondary Threshold to £5,000 means that employer National Insurance may now arise on relatively modest part-time earnings.
• In qualifying companies, the presence of a non-director employee with earnings above that level may enable access to the Employment Allowance of up to £10,500 per year.
• The availability of the allowance can materially affect the relative tax efficiency of salary, dividend and pension funding strategies.

For director PAYE rules and National Insurance thresholds, see:
Taxation and PAYE for Director-Owners (2025/26).

Claiming the Employment Allowance

The Employment Allowance is not automatic. An employer must meet specific statutory conditions before it can claim it.

In broad terms, the allowance is available where:

• at least one person is on the payroll who is not a director; and
• that non-director’s earnings exceed the £5,000 Secondary Threshold so that employer Class 1 National Insurance arises.

We explain how the Employment Allowance interacts with director PAYE planning in:
Taxation and PAYE for Director-Owners (2025/26).

These conditions determine whether the allowance can be claimed at all. The mechanics and financial effect were outlined in the Autumn Budget section above.

When the Employment Allowance is not available

The allowance does not apply in every case. Certain employments are excluded even where the general conditions above appear to be met.

These exclusions include domestic staff employed for private purposes, employments outside the UK National Insurance system, and restrictions applying to connected companies or group structures. The detailed exclusions are set out in legislation and reflected in HMRC guidance.

The position set out here reflects the statutory framework and current HMRC guidance.

Employing a spouse or civil partner to access the Employment Allowance

In many small companies, a spouse or civil partner already contributes to the running of the business. Formalising that involvement through employment may therefore be appropriate.

Employing a spouse or civil partner in a paid, non-director role can enable the business to qualify for the Employment Allowance. The role does not need to be technical or specialist. Many small businesses require routine support such as bookkeeping, invoice preparation, record-keeping, customer correspondence, diary management, supplier liaison, website updates or social media handling.

These tasks can often be carried out from home and outside standard office hours. In modern households, where both partners may have demanding careers or other commitments, a small number of structured weekly hours can still be workable.

The role must be real and properly organised. Duties should be defined, time should be recorded where appropriate, and pay should reflect the work undertaken.

The spouse or civil partner must not be a director. The employment should be established in the same way as any other employee arrangement, with proper payroll registration, PAYE operation and reporting to HMRC.

For PAYE registration and payroll setup when employing a spouse, see:
Taxation and PAYE for Director-Owners (2025/26).

Company pension schemes

Director-owners can take value from their companies as salary, dividends or pension contributions. Employer-funded pension schemes provide a separate route and, in some cases, the most efficient.

Tax treatment of employer pension contributions

When a company pays pension contributions on behalf of a director, the payment is made directly from company profits. The director does not first have to extract funds as salary or dividends and incur personal tax before funding the pension.

Employer pension contributions do not attract employee or employer National Insurance. By contrast, salary above the £5,000 Secondary Threshold gives rise to employer National Insurance at 15%, unless relieved by the Employment Allowance. Where the allowance is not available or already used, that 15% is a permanent cost.

Employer pension contributions reduce the company’s taxable profits. For 2025/26, companies with profits between £50,000 and £250,000 receive effective marginal corporation tax relief of up to 26.5% on deductible amounts.

For the full line-by-line corporation tax and pension deductibility workings, see:
Supporting Appendix – Full Technical Workings (2025/26).

Unlike personal pension contributions, employer contributions are not restricted by the director’s level of earned income. A director whose personal income consists largely of dividends can therefore receive substantial pension funding from the company without being constrained by salary levels.

Annual allowance and carry-forward

Pension contributions are subject to the annual allowance, currently £60,000. The allowance applies per individual rather than per company.

Unused allowances from the previous three tax years may be carried forward. This allows up to four years of allowances to be used in a single tax year, provided the individual was a member of a registered pension scheme during those earlier years. Establishing a pension scheme early preserves this flexibility.

Contributions must be supportable by reference to the company’s profits and overall remuneration level. Where profits increase after a period of lower income, the carry-forward rules can permit significant one-off contributions.

Scheme structures: SIPPs and SSASs

Employer pension funding may be made into different types of scheme.

A Self-Invested Personal Pension (SIPP) allows the individual to control how pension funds are invested. A Small Self-Administered Scheme (SSAS) is an occupational pension scheme established by a company for its directors.

These schemes can acquire commercial property and lease it back to the trading company on commercial terms. Rent paid by the company is deductible for corporation tax. Rental income and capital growth arising within the pension scheme are not subject to corporation tax or income tax at that stage.

A SSAS may also lend money back to the sponsoring employer. Loans are generally limited to 50% of the scheme’s net assets, must be secured, and must be made on commercial terms.

For some director-owners, this allows pension funds to support the business while remaining within the pension scheme.

Deductibility and the wholly and exclusively rule

Employer pension contributions must be made wholly and exclusively for the purposes of the trade. In practice, this requires that the contribution forms part of the director’s remuneration and is reasonable in the context of the company’s profits and activities.

Where that test is satisfied, pension contributions form part of a lawful and established remuneration structure for director-owners.

Salary, dividends and pensions – year-end structuring considerations

For director-owners, the year-end decision is not just a choice between salary and dividends. It is an allocation of profits between salary, dividends and pension funding, taking account of tax rates, reliefs, liquidity and household allowances.

Dividends are taxed at lower rates than salary and do not attract National Insurance. However, they are paid from profits after corporation tax and do not reduce the company’s taxable profits. Dividends also count towards total personal income and can push the director into higher or additional rate bands, including the effective 60% marginal band created by the withdrawal of the Personal Allowance.

The following factors should be reviewed together before profits are extracted.

• Employment Allowance availability

  The first question is whether any Employment Allowance remains available to shelter employer National Insurance on directors’ salaries. Where available, it can eliminate the 15% employer charge on salary above the Secondary Threshold. Where unavailable, that 15% becomes an additional cost to the company.

• Corporation tax relief rate

  Salary, employer National Insurance and employer pension contributions reduce taxable profits. The value of that deduction depends on whether the company is taxed at 19% or within the marginal band where the effective rate is 26.5%. Relief at 26.5% materially changes the extraction calculation.

• Personal marginal tax exposure

  The director-owner’s personal income level must be considered. Income taken as salary or dividends interacts with marginal rate thresholds. The withdrawal of the Personal Allowance between £100,000 and £125,140 creates an effective 60% marginal rate that can significantly increase the tax cost of additional extraction.

• Use of company pension funding

  Employer pension contributions reduce corporation tax and do not attract National Insurance. Funds remain within the pension scheme until statutory access conditions are met. In the case of SSAS arrangements, pension funds may in certain circumstances lend to the sponsoring employer or acquire commercial property leased to the business on arm’s-length terms.

• Working capital and liquidity

  The company’s cashflow and working capital requirements need to be considered. Extracting profits through salary, dividends or pension contributions reduces retained capital and may affect the company’s ability to trade or invest. Although it is possible to leave net pay and dividends undrawn until a later date when the company has adequate reserves.

• Spouse or civil partner remuneration and shareholding

  Where a spouse or civil partner is employed, pay must reflect work actually performed and be set on commercial terms. Where shares are held, dividends follow share ownership. Unused or underutilised personal allowances and lower tax bands within the household should be identified.

• Dividends to adult dependants

  Where share structures permit, dividends may be distributed to adult dependants, such as university-aged children. Their personal allowances and dividend bands may reduce the overall household tax burden, provided company law and tax requirements are satisfied.

Drawing profits and tax planning

Different methods of taking value from a company produce different tax results. Some reduce corporation tax. Some do not. Some are taxed immediately. Some defer tax.

Before considering profit extraction, legitimate business expenses should always be claimed. Properly incurred and documented expenses reduce taxable profits and are not subject to income tax in the hands of the recipient, even if the amounts remain undrawn.

The principal extraction routes operate as follows.

• Reduces corporation tax and may be taxed at 0% personally

  Commercial interest paid on director loans reduces taxable profits. Where the recipient has unused Personal Allowance, Personal Savings Allowance (£1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers) or falls within the £5,000 starting rate for savings, some or all of that interest may be taxed at 0%.

• Reduces corporation tax and defers personal tax

  Employer pension contributions reduce taxable profits and do not attract employee or employer National Insurance. Personal tax arises only when benefits are drawn under pension legislation.

• Reduces corporation tax but is taxed personally

  Salary reduces taxable profits but is taxed as employment income. Both employee and employer National Insurance may arise, depending on thresholds and the availability of the Employment Allowance.

• Does not reduce corporation tax but may use lower personal tax bands

  Dividends are paid from post-tax profits and do not reduce corporation tax. They are taxed at dividend rates after the £500 dividend allowance and count towards total personal income for marginal rate purposes.

Transfers within the household

Transfers between spouses or civil partners who are living together are treated on a no gain, no loss basis for Capital Gains Tax purposes under section 58 of the Taxation of Chargeable Gains Act 1992. The receiving spouse or civil partner inherits the original base cost.

A director’s loan to the company is an asset and may also be transferred between spouses or civil partners. Interest paid on that loan is then assessed according to the receiving spouse’s personal tax position.

Dividends follow legal share ownership. Where shares are held by both spouses or civil partners, income is taxed according to their respective holdings and personal tax positions.

Structuring ownership within the household can allow unused Personal Allowances, dividend allowances and savings allowances to be used within the limits of the legislation.

The early years – using allowances and losses when cashflow is tight

In the early years of trading, many director-owners take little or nothing from the company. Cash is preserved, profits are modest and remuneration is delayed. PAYE registration is often postponed, and allowances are missed.

Some reliefs operate on a year-by-year basis. If they are not used in a tax year, they are lost. Others, such as trading losses, can be carried forward and used later.

In start-ups, dividends are usually unavailable because there are no distributable profits. Director salary therefore becomes the main planning tool.

Salary processed through PAYE uses Personal Allowances and lower tax bands, even if no cash is withdrawn. The net amount can be credited to the director’s loan account, allowing funds to remain in the business while the allowances of that tax year are utilised.

Salary also reduces taxable profits. Where profits are low, it can create or increase a trading loss. Trading losses can be carried forward and set against future profits of the same trade.

By contrast, unused Personal Allowances and lower tax bands for a given year cannot be recovered later.

Payroll structure therefore matters at formation. Establishing PAYE early allows allowances to be used, losses to be created and future corporation tax liabilities to be reduced, even where little or no cash is extracted.

State Pension entitlement

Finally director-owners should ensure that State Pension entitlement is not lost in the early years of trading.

A full new State Pension requires 35 qualifying years. A qualifying year is secured where earnings reach at least the Lower Earnings Limit (LEL), which for 2025/26 is £6,396 per year.

At that level, no employee National Insurance is payable and employer National Insurance arises only on £1,396, the excess over the £5,000 Secondary Threshold. At 15%, that employer cost is £209.40 for a full year.

Where earnings exceed the LEL, that structure secures a full qualifying year if the Employment Allowance is not available. If the Employment Allowance applies, even that £209.40 cost may be eliminated.

Missing years can usually be bought later through Class 3 voluntary contributions, currently around £900 per year.

Securing a qualifying year through payroll while the company is trading is therefore materially less expensive than purchasing it later.

Appendix – Worked comparison: how the Employment Allowance changes the maths

This appendix shows, with the same company profits and the same £100,000 extraction target, how the Employment Allowance (EA) changes the overall tax outcome for director‑owners.

It is illustrative. It assumes the director has no other income using up allowances or bands, and uses 2025/26 rates and thresholds.

Assumptions used (both tables)

• Company profit before any director remuneration: £200,000
• Director‑owner wishes to extract £100,000 of value
• Employer NIC rate: 15% and Secondary Threshold: £5,000 p.a.
• One director‑owner and one part‑time non‑director employee
• Dividend allowance: £500
• Figures shown to 2 decimal places (pence)

Summary table (with and without Employment Allowance)

Amounts are shown in £000s (so 75.0 = £75,000).

	WITH EMPLOYMENT ALLOWANCE			WITHOUT EMPLOYMENT ALLOWANCE
	75 salary + 25 pension	30 salary + 70 dividend	100 dividend	75 salary + 25 pension	30 salary + 70 dividend
Company-Level Calculation
Company profit before deductions	200.00	200.00	200.00	200.00	200.00
Salary	(75.00)	(30.00)	–	(75.00)	(30.00)
Employer NIC (ERs NIC)	0.00	0.00	–	(10.50)	(3.75)
Pension contribution (employer)	(25.00)	–	–	(25.00)	–
Taxable profit	100.00	170.00	200.00	89.50	166.25
Corporation tax	(22.75)	(41.30)	(49.25)	(19.97)	(40.31)
Dividend paid	–	(70.00)	(100.00)	–	(70.00)
Net company retained	77.25	58.70	50.75	69.53	55.94
Personal-Level Calculation
Personal tax & employee NIC	(20.94)	(23.40)	(19.91)	(20.94)	(23.40)
TOTAL PAID TO HMRC	(43.69)	(64.70)	(69.16)	(51.41)	(67.45)
Net cash to director (now)	54.06	76.60	80.09	54.06	76.60
Pension value (deferred)	25.00	–	–	25.00	–
NET RETENTION (DIRECTOR + COMPANY)	156.31	135.30	130.84	148.59	132.54

Footnote: “Total paid to HMRC” includes corporation tax, employer NIC (where payable), income tax, employee NIC and dividend tax.

Full workings (PAYE, NIC, corporation tax and dividend tax): See the calculation notes.

What this shows: with the same company profit and the same £100,000 extraction goal, the total tax outcome can change materially depending on whether the Employment Allowance is available — and salary‑heavy outcomes are the most sensitive to that relief.

Full audit trail: see the full technical appendix (salary tax, NIC, dividend band slicing, marginal relief) here:
Supporting Appendix – Full Technical Workings (2025/26).

A note on interpretation and debate

Examples of other excluded employments (for completeness)

The regulations contain a small number of additional exclusions that rarely affect owner‑managed companies but are included here for completeness. These include, for example:

• domestic employments, such as nannies, carers or cleaners employed wholly for private household purposes;
• employments where the employee is not subject to UK National Insurance (for example, certain overseas employments governed by foreign social security systems);
• public authority employments, covering central and local government bodies and similar entities; and
• other narrow statutory exclusions applying to specific offices or employments set out in the regulations.

A full and authoritative list of excluded employments can be found in the Employment Allowance (Excluded Employments) Regulations 2014 and summarised in HMRC guidance (see Legislative and HMRC references below).

The interpretation adopted above follows a strict reading of the legislation and is intended to reflect the safest approach in practice for most small, director‑owned companies.

Alternative readings of regulation 3A are sometimes discussed in professional forums and online commentary. Those debates turn on how narrowly the phrase “the only employee in respect of whom secondary Class 1 contributions are payable” should be read.

This article does not attempt to resolve that wider debate. It sets out the position that is least likely to be challenged in practice and most consistent with the policy intent behind the Employment Allowance.

Readers interested in the technical arguments on either side may wish to explore those discussions separately.

Statutory references and guidance

The analysis in this article is based on the following UK legislation, HMRC guidance and supporting authorities, as in force for the 2025/26 tax year unless stated otherwise.

Primary legislation

• Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) – Part 2 (employment income), including provisions relating to earnings, directors’ remuneration and the operation of PAYE.
• Social Security Contributions and Benefits Act 1992 (SSCBA 1992) – framework for Class 1 National Insurance contributions.
• Social Security Contributions and Benefits Act 1992, section 6 – earnings factors and contribution records for State Pension purposes.
• Social Security Contributions and Benefits Act 1992, Schedule 1 – Class 1 National Insurance contribution structure.
• Corporation Tax Act 2009 (CTA 2009) – Part 3 (trading income), including deductibility of remuneration and employer pension contributions under the wholly and exclusively rule.
• Corporation Tax Act 2009, section 307 – tax treatment of interest arising on loans to companies (loan relationships).
• Corporation Tax Act 2010, section 45 – carry-forward of trading losses against future profits of the same trade.
• Finance Act 2004 – Part 4 (registered pension schemes, annual allowance and carry-forward provisions).
• Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), section 626 – settlements legislation: spousal exemption.
• Taxation of Chargeable Gains Act 1992 (TCGA 1992), section 58 – no gain/no loss transfers between spouses or civil partners.
• Taxation of Chargeable Gains Act 1992, section 288 – definition of spouses or civil partners living together for CGT purposes.

Employment Allowance

• National Insurance Contributions Act 2014, section 1 – Employment Allowance.
• Employment Allowance (Excluded Employments) Regulations 2014 (SI 2014/1903), in particular regulation 3A (director-only payroll exclusion).

National Insurance thresholds and pension entitlement

• Social Security (Contributions) Regulations 2001 (SI 2001/1004) – earnings thresholds, including the Lower Earnings Limit (LEL) and Secondary Threshold.
• Pensions Act 2014 – new State Pension framework and qualifying years.

HMRC manuals and official guidance

• HMRC Employment Allowance guidance (NIM06500 onwards).
• HMRC National Insurance Manual – earnings limits, contribution credits and directors’ NIC treatment.
• HMRC PAYE Manual – operation of PAYE for directors.
• HMRC Business Income Manual (BIM) – wholly and exclusively test for deductibility of remuneration and pension contributions.
• HMRC Pensions Tax Manual – employer pension contributions, annual allowance and carry-forward rules.

Case law (principles referenced)

• Mallalieu v Drummond [1983] STC 665 – meaning of the “wholly and exclusively” test.
• McKnight v Sheppard [1999] STC 699 – purpose and deductibility of employment-related expenditure.
• Copeman v William Flood & Sons Ltd [1940] 24 TC 53 – remuneration deductibility and commercial justification.
• Jones v Garnett (Arctic Systems Ltd) [2007] UKHL 35 – settlements legislation and spousal shareholdings.

Important note on interpretation and reliance

The examples and commentary in this article describe the general operation of UK tax legislation in typical owner-managed company scenarios. The availability of reliefs — including the Employment Allowance, corporation tax deductions for remuneration or pension contributions, or no gain/no loss transfers between spouses or civil partners — will depend on the specific legal and commercial facts of each case and on compliance with applicable statutory conditions (including National Minimum Wage requirements and the “wholly and exclusively” rule).

Nothing in this article should be taken as implying that any particular tax outcome will arise in practice. Anti-avoidance provisions (including the settlements legislation) may apply where arrangements are not implemented on genuine commercial terms, and different capital gains tax consequences may arise where spouses or civil partners are not living together in the relevant tax year.

This article is illustrative only and does not constitute tax advice. Specific professional advice should be obtained before implementing any remuneration, shareholding or profit-extraction structure.

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Related 2025/26 Director Tax Planning Guides

• Taxation and PAYE for Director-Owners (2025/26)
• Supporting Appendix – Full Technical Workings (2025/26)

Taxation And Paye For Director-owners (2025/26) – Link Insertion Markup