The director salary decision is the first and most consequential extraction choice for most owner-managers. Set it too high and you create unnecessary National Insurance costs. Set it too low and you miss corporation tax savings and leave personal allowance unused. This guide covers every common salary level for 2026/27, with worked examples showing the true cost at each.
Updated 2026/27 · LimitedCompanyTaxCalculator.co.uk · Editorial standards · Methodology
Every pound of director salary has effects on two tax calculations simultaneously. At company level, the salary is a deductible expense reducing taxable profit before corporation tax. At personal level, the salary is subject to income tax and potentially National Insurance. The optimal salary sits at the point where the corporation tax saving from the company deduction outweighs the personal NI cost created.
For 2026/27 the key thresholds are: £5,000, the employer NI secondary threshold, above which the company pays 15% employer NI on the salary; £6,708, the lower earnings limit, at which salary qualifies the director for a contributory National Insurance year without actually paying NI; £12,570, the personal allowance, the point at which the full personal allowance is used and all salary is income-tax-free and free of employee NI.
For most directors £12,570 is optimal, with £5,000 or £6,708 as lower alternatives where avoiding employer NI matters. For directors with multiple employments, specific mortgage requirements, or companies in particular tax positions, other levels may make more sense. This guide works through each option with 2026/27 numbers.
Taking salary at exactly £5,000 (the employer NI secondary threshold for 2026/27) means the company pays zero employer NI, because employer NI at 15% only applies to salary above £5,000. A slightly higher £6,708 (the lower earnings limit) still triggers only £256.20 of employer NI (15% × (£6,708 − £5,000)) but secures a qualifying year for the State Pension. Below the lower earnings limit, the year does not count towards the State Pension.
Corporation tax saving from a £5,000 salary: at the 19% small profits rate, the company saves £950. At the 25% main rate, £1,250. At the 26.5% marginal rate, £1,325. The director pays no income tax on this salary (it is well below the £12,570 personal allowance) and no employee NI (employee NI applies above £12,570). Net personal income from salary: £5,000.
The drawback of a low salary is that most of the £12,570 personal allowance is unused as salary. However, unused allowance above the salary level still shelters the first portion of dividends from income tax: the dividend tax calculation applies after the personal allowance has absorbed the salary, so dividends up to the remaining allowance sit in the personal allowance and are tax-free (only dividend tax rates apply to what's above the allowance). Even so, £12,570 is usually the better level because it fully deducts against corporation tax while the employer NI is either covered by the Employment Allowance or outweighed by the corporation tax saving.
Taking salary at £12,570 uses the full personal allowance and is the optimal choice for most directors. The salary is income-tax-free for the director. The cost: employer NI at 15% on (£12,570 − £5,000) = £1,135.50. If the company is eligible for the Employment Allowance (2+ payrolled employees or directors), this is covered in full and the net employer NI is £0. Otherwise the employer NI is a deductible company expense, so the total company deduction from this salary is £12,570 + £1,135.50 = £13,705.50.
Corporation tax saving from the £13,705.50 deduction: at 19%, approximately £2,604. At 25%, £3,426. At 26.5% marginal rate, £3,632. Comparing a £5,000 salary with a £12,570 salary at the 19% rate: the extra corporation tax saving from the larger deduction is about £1,654 (£2,604 − £950), while the extra employer NI cost is £1,135.50. So the £12,570 salary is roughly £519 better on a pure cash basis even without the Employment Allowance, and £1,135.50 better with it. At the 26.5% marginal rate the advantage is larger still.
This means £12,570 is the optimum at every corporation tax rate: the corporation tax saving on the larger salary deduction outweighs the employer NI, and with the Employment Allowance the employer NI disappears entirely. A lower salary (£5,000 or £6,708) only wins where a company wants to avoid triggering any payroll NI, such as a sole-director company that has not weighed the corporation tax benefit, or where non-tax factors dominate. For mortgage affordability evidence and pension contribution capacity, the higher £12,570 salary is also preferable.
The National Minimum Wage (NMW) does not automatically apply to company directors. Directors are not considered workers under employment law unless they have a separate employment contract. A director who serves purely in their capacity as a statutory director (without a service contract) is not entitled to NMW and is not obligated to pay it.
For 2026/27, the National Living Wage (the NMW rate for workers aged 21 and over) is £12.71 per hour. For a director working a nominal 40-hour week, 52 weeks per year, this equates to approximately £25,396 per year, significantly above the £5,000 to £12,570 salary benchmarks used for tax efficiency. Directors who have employment contracts in addition to their director roles may need to consider NMW compliance separately.
In practice, many limited company directors pay themselves no salary, a low salary, or a salary specifically set for tax efficiency reasons, well below NMW levels, without any NMW compliance issue, because their director's fee arrangement does not constitute an employment contract subject to NMW. If you are uncertain whether NMW applies to your arrangement, take advice from an employment lawyer or your accountant.
Use £12,570 (the default optimum) if: you want to use the full personal allowance; you have no other income sources competing for it; or the Employment Allowance is available to your company (offsetting the employer NI entirely). Even for a sole-director company without the allowance, the corporation tax saving on the larger deduction outweighs the £1,135.50 employer NI, so £12,570 is still the efficient choice.
Use £5,000 if: you specifically want to avoid triggering any employer NI at all (for example a sole-director company prioritising zero payroll NI over the extra corporation tax saving), and you do not need the higher declared income for mortgage or credit purposes.
Consider a salary of £6,708 if: you want to qualify for a National Insurance contributory year (securing State Pension entitlement) at a low salary. £6,708 is the lower earnings limit, the point at which the year counts towards the State Pension; a salary at this level triggers only £256.20 of employer NI (15% × (£6,708 − £5,000)) and no employee NI or income tax.
Company profit before salary: £75,000. Scenario A (salary £5,000): No employer NI (salary is at the secondary threshold). Taxable company profit: £75,000 − £5,000 = £70,000. Corporation tax at marginal relief: £14,800 (25% × £70,000 − 3/200 × (£250,000 − £70,000)). Post-tax profit for dividends: £55,200. Personal income: £5,000 + £55,200 = £60,200. Salary is covered by the personal allowance, leaving £7,570 of allowance to shelter dividends. Dividend tax: £7,570 in the remaining allowance is tax-free, £500 dividend allowance, £37,200 at 10.75% = £3,999, £9,930 at 35.75% = £3,550. Total dividend tax: £7,549. Personal take-home: approximately £52,651. Total tax (corp tax + employer NI + dividend tax): £22,349.
Scenario B (salary £12,570): Employer NI £1,135.50 (nil if the Employment Allowance applies). Taxable company profit: £75,000 − £12,570 − £1,135.50 = £61,294.50. Corporation tax at marginal relief: £12,493. Post-tax profit for dividends: £48,801. Personal income: £12,570 + £48,801 = £61,371. Dividend tax: £500 allowance, £37,200 at 10.75% = £3,999, £11,101 at 35.75% = £3,969. Total dividend tax: £7,968. Personal take-home: approximately £53,403. Total tax: £12,493 + £1,135.50 + £7,968 = £21,597 (or £20,461 if the Employment Allowance covers the employer NI).
At £75,000 profit, the £12,570 salary route gives roughly £752 more take-home and around £752 less total tax than the £5,000 route, because the larger salary deduction reduces corporation tax by more than it adds in employer NI. If the company qualifies for the Employment Allowance, the £12,570 salary is better still, since the employer NI is fully covered. The £5,000 salary only appeals to a sole-director company that wants zero payroll NI.
£12,570 for most directors: it uses the full personal allowance, and the £1,135.50 employer NI is either covered by the Employment Allowance (companies with 2+ payrolled employees) or outweighed by the corporation tax saving on the larger deduction. A lower salary of £5,000 (no employer NI) or £6,708 (State Pension credit) suits a sole-director company that wants to avoid triggering payroll NI.
No. A company where the director is the only employee cannot claim Employment Allowance. Employment Allowance is only available where there is at least one worker who is not a director, or where the company has two or more directors who are both employees.
Not automatically. Directors who serve in a purely statutory capacity (without a separate employment contract) are not entitled to NMW. Most limited company directors set their salary for tax efficiency reasons without NMW applying. If you have a service contract as an employee in addition to your director role, NMW compliance should be verified.
£5,000 per year. Employer NI at 15% applies to salary above this threshold. A salary at or below £5,000 triggers zero employer NI. A salary of £12,570 triggers employer NI on £7,570, costing the company £1,135.50 (nil if the Employment Allowance applies).
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.