Optimum director salary: 2026/27
Optimum Director Salary 2026/27: £12,570 vs £5,000 vs £9,100 Compared
What is the most tax-efficient director salary to pay yourself in 2026/27? Full worked comparison covering: solo-director constraints (Employment Allowance unavailable), 2+ employee Employment Allowance £10,500 absorbing all employer NI, Lower Earnings Limit £6,725 for State Pension credit year, top-up dividend route up to £50,270 basic-rate band, comparison vs gross employed salary, total personal income £50,015 with combined effective rate ~25%.
Quick answer for 2026/27
2+ employees / directors
£12,570
Employment Allowance £10,500 wipes employer NI. Full PA used. Zero income tax, zero NI. Most tax-efficient mix overall.
Sole director (no other employees)
£12,570
Same £12,570 salary. Cannot claim EA. Employer NI £1,135.50 - CT relief brings effective cost to ~£920. Still better than £9,100 or £5,000 by personal-tax savings on the extra salary.
Key 2026/27 employer NI numbers
| Threshold | 2024/25 | 2025/26 onwards | Change |
|---|---|---|---|
| Secondary Threshold (ST) | £9,100 | £5,000 | Cut £4,100 |
| Employer NI rate | 13.8% | 15% | +1.2 pp |
| Employment Allowance | £5,000 | £10,500 | +£5,500 |
| Lower Earnings Limit (LEL) | £6,396 | £6,725 | +£329 (uprated) |
These changes (Autumn Budget 2024, taking effect April 2025) shifted the small-business calculation noticeably. The £4,100 cut in Secondary Threshold combined with the 1.2pp rate rise made employer NI a real cost for sole-director companies even at PA-level salaries.
Salary-only comparison: 4 scenarios
| Scenario | Salary | Employer NI | CT saving | Net cost to company | Net to director |
|---|---|---|---|---|---|
| £5,000 (Secondary Threshold) No employer NI, but no NI credit qualifying year either. | £5,000 | £0 | £950 | £4,050 | £5,000 |
| £5,000 solo director Exactly at ST: no employer NI, salary too low for NI credit year. | £5,000 | £0 | £950 | £4,050 | £5,000 |
| £12,570 solo director Full Personal Allowance used. £1,135.50 employer NI (no Employment Allowance for solo). CT relief on the NI = effective cost ~£862. | £12,570 | £1,136 | £2,604 | £11,101 | £12,570 |
| £12,570 + 2nd employee or director Employment Allowance £10,500 wipes employer NI entirely. Full PA used. Optimal for most small LTDs. | £12,570 | £0 | £2,388 | £10,182 | £12,570 |
Full salary + dividend split to £50,270
For each scenario, the maximum basic-rate dividend top-up (filling the band to £50,270) plus the resulting total take-home and effective overall tax rate including Corporation Tax on the underlying profit.
| Scenario | Salary | Dividend | Net to director | Total cost | Effective rate |
|---|---|---|---|---|---|
| £5,000 (Secondary Threshold) | £5,000 | £45,270 | £46,353 | £60,889 | 23.9% |
| £5,000 solo director | £5,000 | £45,270 | £46,353 | £60,889 | 23.9% |
| £12,570 solo director | £12,570 | £37,700 | £47,015 | £60,249 | 22.0% |
| £12,570 + 2nd employee or director | £12,570 | £37,700 | £47,015 | £59,113 | 20.5% |
"Total cost" includes the Corporation Tax cost of the underlying profit needed to fund the dividend (at 19% small-profits rate). "Effective rate" = (total cost - net take-home) / total cost.
Why £12,570 wins for nearly everyone
The £12,570 salary level uses the full Personal Allowance, qualifies for a State Pension credit year, and either costs zero employer NI (Employment Allowance claimable) or only £920 net of CT relief (solo director). The marginal benefit of paying yourself the extra £7,570 above the £5,000 Secondary Threshold:
- Sole director: £7,570 of extra personal income (gross = net since under PA). Costs the company £7,570 + £1,135.50 employer NI - £1,654 CT relief on (£7,570 + £1,135.50) = £7,051. Per £ of extra personal income: 93p effective. Better than dividend extraction at higher salary levels.
- 2+ employee company: £7,570 of extra personal income. Costs the company £7,570 - £1,439 CT relief = £6,131. Per £ of personal income: 81p effective. Equivalent to a 19% combined tax rate - vs ~25-30% on equivalent dividend extraction once CT is factored in.
The "round down to £9,100" pattern (old Secondary Threshold) is leftover advice from before April 2025 when £9,100 was the highest salary with zero employer NI. With the threshold cut to £5,000, the £9,100 pattern now pays employer NI on £4,100, losing the supposed advantage. Either go to £5,000 (no NI) or £12,570 (full PA used) - never in between.
Lower Earnings Limit: don't pay below £6,725
Salaries between £6,725 (LEL) and £12,570 (PT) earn a State Pension qualifying year at zero NI cost. Salaries below £6,725 do NOT count for State Pension purposes. The full new State Pension is £241.30/week (£12,547.60/year) for 2026/27, needing 35 qualifying years. Missing a qualifying year via too-low salary forces you to either work an extra year later in life or buy a Class 3 voluntary NI year for £956.80.
This is why £5,000 (ST level) is generally a worse choice than £6,725 (LEL) for new directors building National Insurance history. The marginal £1,725 of extra salary costs nothing in employer NI (still under ST? - yes, since ST is £5,000 not £6,725... wait, ST is £5,000 so the £1,725 between £5,000 and £6,725 DOES attract employer NI at 15%) - so the cost is £258 employer NI - £49 CT relief = £209 to buy a State Pension qualifying year, which Class 3 sells for £956.80. Saving £748 per year of National Insurance credit. Pay at least £6,725.
Frequently asked questions
What is the optimum director salary for 2026/27?
If you can claim Employment Allowance (i.e. 2+ employees on payroll, not just a sole director): pay £12,570 salary. This uses the full Personal Allowance, qualifies for a State Pension credit year, and the £10,500 Employment Allowance wipes the £1,135.50 employer NI entirely. Net: zero NI, zero income tax on salary. Sole directors (just one director on payroll, no other employees) cannot claim Employment Allowance (this was excluded from April 2016 - Section 2 National Insurance Contributions Act 2014 as amended). Pay £12,570 anyway in most cases: the £1,135.50 employer NI is a deductible expense for Corporation Tax, so the effective cost after 19% CT relief is ~£920. The personal benefit (£12,570 of tax-free salary + State Pension credit year) outweighs this. Avoid paying below £6,725 Lower Earnings Limit (LEL) - you would NOT get a State Pension qualifying year.
Why can't solo directors claim the £10,500 Employment Allowance?
Section 2 of the National Insurance Contributions Act 2014, as amended by the Employment Allowance (Excluded Companies) Regulations 2016, excludes companies where the only employee paid above the Secondary Threshold is a single director. The policy intent was to prevent personal service companies from extracting the Employment Allowance as a pure tax cut. The "second employee" workaround is widely used: hiring a spouse or family member for a genuine role (even part-time minimum-wage work) makes the company eligible for the full £10,500 EA. HMRC will challenge sham arrangements where the second "employee" has no real duties - the role must be genuine, reasonable hours, and at or above NMW for the work performed.
What are the employer NI thresholds for 2026/27?
Secondary Threshold (ST): £5,000 per year. Below this the company pays zero employer NI. Cut from £9,100 (2024/25) to £5,000 from April 2025, frozen at £5,000 for 2026/27. Employer NI rate: 15% on earnings above ST. Raised from 13.8% to 15% from April 2025. Employment Allowance: £10,500 per company per year, raised from £5,000 to £10,500 from April 2025, held at £10,500 for 2026/27. Apprenticeship Levy: 0.5% on pay bills above £3 million (rare for owner-managed companies).
Will my salary qualify for a State Pension credit year?
Yes if paid at or above the Lower Earnings Limit (LEL) £6,725 per year for 2026/27 (held from 2025/26 - LEL is frozen with the rest of the personal-tax thresholds through April 2030). Salaries at LEL or above earn a State Pension qualifying year. Both £5,000 and £12,570 are above LEL so both qualify. The Class 3 Voluntary NI alternative costs £956.80 for 2026/27 (£18.40 × 52 weeks) - so paying yourself just above LEL is cheaper than voluntarily buying the year, even with the small Corporation Tax cost. State Pension full new rate is £241.30/week (£12,547.60/year) for 2026/27, needing 35 qualifying years for full entitlement.
Should I pay myself more than the Personal Allowance?
Generally no for a small-co. owner-director. Above £12,570: salary is subject to 20% income tax personally, 8% employee NI personally, AND 15% employer NI for the company. Dividends instead carry only 8.75% income tax with no NI on either side. Worked comparison: £1,000 of extra salary above PA costs £200 income tax + £80 employee NI + £150 employer NI = £430 total tax for £570 net to director. Same £1,000 as dividend (after 19% CT cost on the gross profit £1,235 needed): £1,000 dividend × 8.75% = £87.50 tax for £912.50 net. So £912.50 vs £570 net from £1,235 of pre-tax profit - dividend wins by £342.50 per £1,000. Salary IS preferable for: making pension contributions (need relevant earnings), claiming Working Tax Credit / Universal Credit, qualifying for mortgages (lenders prefer salary), or above £50k where additional sources prefer salary recognition.
What if I have multiple directors / a spouse on payroll?
If there are 2+ directors / employees paid above the Secondary Threshold, the company CAN claim Employment Allowance. Pay both directors £12,570 = total £25,140 salary. Combined employer NI = 2 × £1,135.50 = £2,271, fully absorbed by the £10,500 Employment Allowance. Combined net cash out to directors after own PA = £25,140 (£25,140 of tax-free salary). Then each director takes basic-rate dividends up to £50,270 personal threshold (£37,700 each = £75,400 of dividends taxed at 8.75% = £6,597 combined dividend tax). Total household take-home ~£94k of personal income for £93k of total personal tax bill. The "second director" must genuinely act as a director (not just be on payroll). HMRC scrutinises director-spouse arrangements for genuineness.
What about pension contributions instead of dividends?
Employer pension contributions are the third route alongside salary + dividend. Up to £60,000 (the Annual Allowance for 2026/27) employer pension contributions are: deductible for Corporation Tax (saves 19-25%), zero income tax to the recipient, zero NI on either side, and grow tax-free inside the pension wrapper. The catch: pension funds are locked until age 55 (rising to 57 from April 2028) so liquidity is poor. For founders intending to keep wealth in the business through retirement, max-employer-pension + lifestyle-salary + dividend-for-current-needs is the most tax-efficient mix. Carry-forward rules let unused Annual Allowance from the previous 3 years stack up — so a founder cashing out before retirement can pay up to £240k of employer pension contribution in one tax year, deductible against Corporation Tax. See our maximum pension contribution calculator for details.
How do I run payroll as a director?
Register the company as an employer with HMRC via PAYE Online before the first payday. File Full Payment Submissions (FPS) via approved payroll software (BrightPay, Moneysoft, Xero Payroll, FreeAgent, Sage Payroll) on or before each pay date. For an annual payment scheme (paying yourself once a year as a director), file a single FPS in March marked as "Annual scheme". This avoids monthly RTI overhead but does NOT exempt you from RTI - HMRC still expects the annual filing. Director pension contributions via salary sacrifice are NOT efficient since there's no NI saving on the salary anyway at low PA-level amounts - take employer contributions directly instead. Yellow card: missing the FPS filing on or before payday triggers automatic late-filing penalties (£100+ per month for 1-9 employees).
What about the £100k - £125,140 Personal Allowance taper?
If your total income (salary + dividend + other) exceeds £100,000, your Personal Allowance tapers by £1 for every £2 above £100k, fully withdrawn at £125,140. Marginal effective rate in this band is 60% on salary (40% IT + 20% PA-loss) and ~67.5% on dividends (33.75% + 33.75% × PA loss). Avoid this band aggressively: cut dividend below £100k or pump pension contributions to bring adjusted net income under £100k. A director earning £105k can either pay £10,000 of personal pension contribution (lifting adjusted income to £95k - PA preserved) or take £5k less dividend (£95k - PA preserved, but less cash). The pension route is generally better because the money stays yours; the dividend route just transfers cash to retained profits. See our 100k tax trap calculator for the detailed taper math.
Does the optimum change if I'm IR35 caught?
Yes, dramatically. If you're an inside-IR35 contractor receiving a "deemed payment" (Chapter 8) or umbrella-routed PAYE (Chapter 10), the deemed payment / umbrella salary is taxed as employment income at full UK rates - 20% / 40% / 45% income tax plus 8% / 2% employee NI plus 15% employer NI charged to the company / agency / umbrella. There is no scope for "salary optimisation" because the entire engagement value is treated as salary. The dividend route is unavailable for the IR35-caught portion. Your only optimisations are: pension contributions from the deemed pay, expense reimbursement for genuine business expenses, and the £5,000 trivial benefits exemption. See our inside IR35 guide for the full IR35 status framework and 3-status-test detail.
What about closing the company and taking it as CGT?
For larger profit extractions, a Members' Voluntary Liquidation (MVL) gets the retained profits out at Capital Gains Tax rates (10% with Business Asset Disposal Relief on first £1m lifetime, 20% above) instead of income tax + dividend tax. Total effective tax on extraction: 19% CT on the underlying profit + 10% BADR CGT = ~27% (with £3,000 annual exempt amount). Same value via dividend: 19% CT + up to 39.35% dividend tax = up to 51% effective. MVL only works if: company genuinely stops trading, no phoenix activity (starting same trade within 2 years), and the Targeted Anti-Avoidance Rule (TAAR) is not triggered. £25,000 MVL distribution threshold for capital treatment via informal striking-off (ESC C16 successor); above £25k a formal liquidator is needed (~£2-5k cost). Worth it for retained profits above ~£50k.
Does the answer change for personal service companies / single-owner contractors?
The optimum salary calculation is the same, but the surrounding context differs. Personal service companies (PSCs) face: (1) IR35 risk where the engagement might be deemed inside IR35 under Chapter 8 (small client) or Chapter 10 (medium/large client - off-payroll working). Inside IR35 nullifies the salary-dividend optimisation. (2) Section 24 / NIC anti-avoidance: HMRC scrutinises 50:50 spouse share arrangements (Arctic Systems case 2007 confirmed legitimate, but only where spouse has genuine economic involvement). (3) Loss of Employment Allowance already discussed. (4) Pension contribution limits: PSC owners need genuine economic role to justify large employer pension contributions - HMRC will challenge contributions that look like profit extraction without commercial purpose. See our contractor calculator for full PSC take-home math including these constraints.
Related calculators and guides
- Dividend tax calculator - the dividend side of the salary + dividend split.
- Contractor calculator - full PSC take-home including IR35 status.
- Inside IR35 meaning - when the salary optimisation breaks down.
- Sole trader vs Limited Company - is the LTD setup even worth it?
- Max pension contribution calc - the pension third route alongside salary + dividend.
- Director pension strategies - SSAS, carry forward, employer contribution mechanics.
- Corporation Tax calculator - the company-side tax that funds the dividend.
- £100k tax trap - the PA-taper band to avoid.