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Director’s salaries

For the UK tax year 2025/26, the most tax-efficient director’s salary strategy for directors of small limited companies

Option A: £12,570 per annum — Most tax-efficient overall

  • Fully uses your Personal Allowance, meaning no Income Tax on salary
  • Avoids Employee’s NI, because the Primary Threshold matches the allowance
  • Triggers Employer’s NIC only on earnings above £5,000. As a sole director (no Employment Allowance), that’s £1,135.50 per annum, which is offset by Corporation Tax savings

If the company has more than one employee or multiple directors, you can claim Employment Allowance £10,500 limit per company. This prevents Employer’s NIC on salary entirely, making the £12,570 salary even more optimal.

Option B: £6,500 per annum — Qualifies for state pension credits with minimal NIC cost

  • Matches the Lower Earnings Limit, so you get a qualifying year toward your State Pension
  • No Employee NI or Income Tax.
  • Employer NI only on £1,500 over the £5,000 Secondary Threshold— £225 per annum
  • No Corporation Tax benefit from higher salary, but low admin and cost.

Option C: £5,000 per annum — Minimal payroll admin, but no NI credits

  • Falls at the Secondary Threshold so no Employer NI, and none for Employee either.
  • Too low to count toward State Pension (below Lower Earnings Limit).
  • Works only if qualifying for NIC credits isn’t a priority.

Comparison Table

Scenario

Salary (£/yr)

Income Tax

NI (Employee)

NI (Employer)

State Pension Qualifying Year

Corporation Tax Benefit

Option A – £12,570 (solo/EA claim)

12,570

£0

£0

~£1,136

✅

✅ (typically outweighs NIC)

Option B – £6,500

6,500

£0

£0

~£225

✅

❌ (no extra deduction)

Option C – £5,000

5,000

£0

£0

£0

❌

❌

Dividend Top-Up Strategy

Once the salary is withdrawn:

  • Use the £500 annual tax-free Dividend Allowance.
  • Any dividends up to the basic rate threshold (total income £50,270, including salary) are taxed at 8.75%.
  • Above that, dividends are taxed at 33.75% (higher rate) and 39.35% (additional rate).

Which Option Is Best for You?

  • Sole director with profits under ~£50k and not claiming Employment Allowance
    Option A (£12,570) maximises overall take‑home pay, due to Corporation Tax savings outweighing Employer NI.
  • Business with multiple directors or employees (EA eligible)
  • Option A is clear winner, since Employer’s NI may be neutralised by the Employment Allowance.
  • If you want minimal payroll admin or don’t need pension credits
    Option C (£5,000) is simplest, but you miss out on state pension credits and Corporation Tax benefit.
  • Want pension qualifying year at lowest NI cost?
    Option B (£6,500) is the middle ground: you get NI credits, little employer NI, and minimal admin.

⚠️ Caveats

  • These recommendations assume your only income is from salary and dividends and that IR35 doesn’t apply
  • Other factors—like student loans, childcare benefits, pension contributions, or additional income—could alter the optimal strategy.

Always keep accurate documentation—board minutes, RTI data, payslips—to support salary and dividend decisions

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