The short answer
For most single-director companies the tax-efficient salary for 2026/27 is either £12,570 (full personal allowance, no employee NI) or a lower figure of around £5,000 to £6,708 where employer NI matters. The right figure depends on whether you can claim the Employment Allowance, your other income and whether you want the year to count towards your State Pension.
Checked 26 October 2026. Rates for 2026/27.Key facts
| Fact | Detail |
|---|---|
| Personal allowance | £12,570 |
| Employee NI starts | £12,570 |
| Employer NI | 15% above £5,000 |
| State Pension credit starts | £6,708 (lower earnings limit) |
| Employment Allowance | £10,500, not for sole-director companies with no other employees |
Why the director salary question matters
A limited company director is both an officer of the company and, usually, an employee. That means you can be paid a salary, and the company can deduct that salary (plus employer National Insurance) before it calculates Corporation Tax. The rest of your profit can then be paid as dividends, which are not subject to National Insurance. The mix between the two is what people mean when they ask about the best director salary.
The question has become more interesting for 2026/27 because the employer National Insurance rate is 15% and the secondary threshold is £5,000. Salary above £5,000 now costs the company employer NI, which reduces the old advantage of paying exactly the personal allowance. At the same time, dividend tax rates rose, so each pound you take as a dividend is taxed more heavily than it was a few years ago. The result is a narrower gap between the options, and more reason to model the numbers properly.
The main salary levels compared
There are three common choices, and each has a logic behind it.
£5,000 a year. This matches the employer NI secondary threshold, so the company pays no employer NI. The salary is above the lower earnings limit of £6,708 only if you go slightly higher, so £5,000 on its own does not earn a qualifying year for the State Pension.
£6,708 a year. This is the lower earnings limit. Earnings at or above it count as if National Insurance had been paid, so the year counts towards your State Pension, even though you pay no employee NI. The company pays a small amount of employer NI on the £1,500 above £5,000, which at 15% is £225, but that cost is itself deductible.
£12,570 a year. This uses your full personal allowance. You pay no income tax and no employee NI, but the company pays employer NI of 15% on £7,570, which is about £1,135. The company then deducts both the salary and the NI, saving Corporation Tax at 19% or more.
Which of these wins depends on your circumstances. A director who can claim the Employment Allowance, which offsets up to £10,500 of employer NI, usually pays no employer NI at all and so tends to prefer £12,570. A sole director with no other employees cannot claim it, and so often lands on £5,000 to £6,708.
How dividends fill the gap
Whatever salary you choose, the rest of the money you draw comes as dividends, provided the company has enough retained profit. Dividends use the remainder of your personal allowance first if your salary is below £12,570, then a £500 dividend allowance, and then they are taxed at 10.75% within the basic rate band, 35.75% within the higher rate band and 39.35% in the additional rate band.
Because dividends are paid out of profits that have already borne Corporation Tax, the true cost of a dividend is the Corporation Tax plus the dividend tax. A company paying 19% Corporation Tax and then a 10.75% dividend tax produces an overall effective rate of around 28% on that slice of profit, compared with a combined employer NI, employee NI and income tax burden of roughly 40% or more on a very large salary. This is why the traditional low-salary, high-dividend structure survives, even though it is less dramatic than it was.
A worked example with £60,000 of profit
Suppose your company makes £60,000 of profit before paying you anything, and you have no other income. You can compare two options.
With a £12,570 salary, the company pays employer NI of about £1,135 and deducts £13,705 in total. Corporation Tax is then charged on about £46,295, which at 19% is £8,796. That leaves roughly £37,500 available for dividends. After the £500 allowance you pay 10.75% on about £37,000, which is around £3,978, so your total take-home is close to £46,100.
With a £5,000 salary, the company pays no employer NI and deducts £5,000. Profit of £55,000 sits inside the marginal relief band, so Corporation Tax is about £10,825, leaving £44,175 for dividends. Your unused personal allowance of £7,570 and the £500 dividend allowance cover the first £8,070 of dividends, and the remaining £36,105 is taxed at 10.75%, which is about £3,881. Take-home is about £45,300.
In this example the £12,570 salary comes out about £800 ahead, mainly because the company deducts a larger salary and saves Corporation Tax on it. The gap is small enough that the State Pension record, mortgage applications and your other income can decide the question just as easily as the tax. Where the Employment Allowance is not available, the difference can narrow further, so it is worth modelling your own figures.
Other factors that change the answer
Your salary decision does not exist in isolation. Several other things can move the optimum.
Other income. If you have employment, rental or savings income elsewhere, your personal allowance may already be used, and a company salary would be taxed at 20% or more.
Student loan repayments. A salary above the repayment threshold triggers deductions through payroll, while dividends are picked up through Self Assessment.
Pensions. An employer pension contribution is deductible for the company and not subject to employer NI, so for many directors it beats both salary and dividends once the personal allowance has been used.
Mortgage and borrowing. Lenders often assess a director’s income on salary plus dividends over two years, so a very low salary can slightly limit what a lender will offer.
Scotland. Scottish income tax bands differ, so the salary and dividend maths needs to be run on Scottish rates for Scottish taxpayers.
How to set the salary up correctly
Whichever level you choose, the mechanics must be right. The company needs to register as an employer with HMRC, run payroll through approved software, and report salary payments to HMRC in real time under PAYE. Even if you pay no tax, the payroll records are what prove your salary and earn your National Insurance credit.
Dividends need separate paperwork: a board minute, a dividend voucher for each payment and enough retained profit at the date of payment. Paying a dividend without profits, or paying one in a way that is not properly declared, can create a director’s loan problem and an unexpected tax bill.
Reviewing the salary once a year, typically at the start of the tax year in April, keeps the structure aligned with the thresholds. If your profit changes sharply, your accountant can adjust the plan during the year instead of finding out at the end.
The bottom line
For most single-director companies the tax-efficient salary for 2026/27 is either £12,570 (full personal allowance, no employee NI) or a lower figure of around £5,000 to £6,708 where employer NI matters. If you would rather not do it alone, our fixed fees start at £45.83 + VAT a month.
Frequently asked questions
What is the most tax-efficient director salary in 2026/27?
For most single-director companies it is £12,570 if you can claim the Employment Allowance, or between £5,000 and £6,708 if you cannot. The difference between the two options is usually a few hundred pounds a year, so State Pension credit and other income matter as much as tax.
Do I have to pay myself a salary?
No. A director can take no salary at all, but then the year does not count towards the State Pension and you lose the Corporation Tax deduction on salary. A modest salary is almost always worth taking.
Can I claim the Employment Allowance as a sole director?
Not if you are the only person on the payroll who is paid above the secondary threshold, because the allowance is not available to a company where the sole employee is also a director. You would need another employee who is paid above the threshold.
Is a director’s salary taxed at source?
Yes. Salary goes through PAYE, so any income tax and National Insurance due is deducted and paid to HMRC by the company each month or quarter. Dividends are not taxed at source and are reported on your Self Assessment return.
This article is general information, not personal tax or financial advice. Rules and rates change, so check GOV.UK or speak to an accountant about your circumstances. Rates shown are for 2026/27, last checked November 2026.