Last updated: 18 October 2026
When planning remuneration for 2026/27, there are two things to consider: how much to pay, and what form the pay takes. With employer’s National Insurance at 15% from a threshold of just £5,000, getting the mix right matters more than ever.
How Much?
The amount employees receive should be in line with their duties if the employer is to get tax relief on it. The payments must be incurred ‘wholly and exclusively’ for the purposes of the trade, profession or vocation (ITTOIA 2005, s 34 and CTA 2009, s 54). If a salary is higher than the job warrants, HMRC could treat the excess as a gift, a non-business payment that is not deductible for the business. This is more likely in family businesses where relatives are employed.
Employees pay income tax and Class 1 National Insurance contributions (NICs) on salaries and bonuses through PAYE, which the employer must operate before passing the tax to HM Revenue and Customs (HMRC). For 2026/27, employees pay NICs at 8% on earnings between £12,570 and £50,270 and 2% above that, and employers pay 15% on earnings above £5,000. Employers in Scotland need to apply the Scottish income tax bands to their Scottish employees, although NICs are charged at the UK rates. Directors are treated in the same way, except that their NICs are worked out on an annual earnings period.
How to be Paid?
Salary or bonuses are what employees and directors usually receive, but other options are worth considering:
- Benefits in kind: these are taxed at the same income tax rates, but employees do not pay NICs on them; employers pay Class 1A NICs at 15% instead. Some benefits are tax-free, for example one mobile phone, extra holiday, employer pension contributions, parking at or near work, workplace nurseries, Cycle to Work schemes and cheap or interest-free loans of up to £10,000. Salary sacrifice now only saves income tax for a limited range of benefits, mainly pensions, childcare, cycles and ultra-low emission cars, but it can still save NICs. From 6 April 2029, employee and employer NICs will be charged on pension contributions made through salary sacrifice above £2,000 a year; the first £2,000 stays NIC-free, and income tax relief is unchanged.
- Shares: employees might receive shares in their employer’s limited company. Under the employment-related securities rules, they are taxed on the value of the shares less anything they pay for them. If the shares are not ‘readily convertible assets’, no NICs are due either. Apart from the NICs treatment, there is no immediate tax saving. But once they hold shares, employees can receive dividends, which are taxed at lower rates (10.75%, 35.75% and 39.35% for 2026/27) and are free of NICs. Shares also give a real incentive: employees feel more like owners than hired help. If they hold enough shares and voting rights, an employee who later sells may qualify for business asset disposal relief (BADR), with capital gains tax (CGT) at 18% from 6 April 2026 instead of the normal 24% higher rate.
- Share options: instead of shares, employees might be given the option to buy them in future at a set price, often with conditions attached as a further incentive. Exercising unapproved share options attracts income tax on the difference between the price paid and the value of the shares. HMRC tax-advantaged schemes, such as Save As You Earn (SAYE), Company Share Option Plans (CSOP) and Enterprise Management Incentives (EMI), offer valuable reliefs. Under SAYE, employees can buy shares at a discount of up to 20% with no income tax when they exercise. Under EMI, there is normally no income tax on exercise if the option price was at least the market value when the option was granted. Future growth is then taxed as a capital gain rather than income, and the BADR rules are more generous for EMI shares. Share options often give more flexibility and a stronger incentive than handing over shares outright, especially when a tax advantage comes with them.
Practical Tip
Shares offer employees greater long-term tax advantages than salary, but they are more complicated and give the employee a stake in the business. That can be a useful incentive, but it may be an unwelcome intrusion in a smaller family-run company. Take advice before issuing shares or options, and agree a valuation with HMRC where a tax-advantaged scheme is involved.
