Director salary decisions affect the company and you personally at the same time. A salary that looks optimal personally may create unexpected employer NI costs for the company. A salary set purely to minimise NI may leave you with a weaker income record and a less efficient extraction overall. The right answer depends on the full picture, not just one layer of it.
Written by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
The tax-efficient director salary for 2026/27 is £12,570 - the full personal allowance. You pay no income tax and no employee National Insurance on it, and the whole amount is a deductible company expense.
It does trigger £1,135.50 of employer NI. If your company has a second employee or director paid above £5,000 it can claim the £10,500 Employment Allowance and wipe that out; a lone director cannot, but the corporation-tax saving on the deduction still makes £12,570 the better choice.
Why £12,570 and not more? It uses the entire personal allowance, so not a penny of income tax lands on it, and it stays under the point where employee NI bites. Here is what the salary costs and saves.
| Salary | £12,570 |
| Income tax on the salaryFully covered by the £12,570 personal allowance | £0 |
| Employee (primary) NI8% only starts above £12,570 | £0 |
| Employer (secondary) NI15% on the £7,570 above the £5,000 threshold | £1,135.50 |
| Company deduction (salary + employer NI) | £13,705.50 |
The whole £13,705.50 comes off profit before corporation tax. Even if you cannot claim the Employment Allowance (a lone director usually cannot), the corporation-tax saving on that deduction outweighs the £1,135.50 employer NI, so £12,570 still beats a lower salary for most one-person companies.
£12,570 is the personal allowance for 2026/27, the point at which income tax kicks in. Taking salary at exactly this level means you pay no income tax on it, making it effectively a tax-free extraction from the company.
The complication is employer NI. For 2026/27, the secondary NI threshold is £5,000, the point above which employer NI at 15% applies. A salary of £12,570 creates employer NI of approximately £1,139 (15% of £7,570). That is a real company cost, though it is itself deductible from company profit before corporation tax.
At the 19% small profits rate, the salary plus employer NI reduces company profit by about £13,709 and saves £2,605 in corporation tax. You receive £12,570 tax-free assuming no other income above the personal allowance. For most owner-managers, this remains an efficient approach.
Some directors set salary at exactly £5,000, just at the secondary threshold, to avoid any employer NI while still making a corporate expense deduction. This saves the employer NI cost (approximately £1,139 at £12,570 salary) but leaves £7,570 of personal allowance unused.
At the 19% small profits rate, the corporation tax saving from £12,570 versus £5,000 salary is approximately £1,305 after accounting for the employer NI cost. But £12,570 gives you a larger official income, which matters for mortgage applications, credit assessments and pension contribution calculations.
Neither level is universally correct. The right choice depends on whether the corporation tax saving outweighs the NI cost, and whether you need the higher declared income for non-tax reasons.
Director salary is taxed through PAYE. You pay employee NI at 8% on salary between £12,570 and £50,270 (2% above £50,270) and income tax at the applicable rate. At exactly £12,570 salary, both are zero assuming no other personal income above the allowance.
The salary creates a gap between the personal allowance (£12,570) and the higher rate threshold (£50,270). Most directors fill this gap with dividends, taxed at 10.75% above the £500 dividend allowance. A tax-free salary plus basic-rate dividends is usually more efficient than taking all income as salary.
If you have other personal income, from a second employment, property income or elsewhere, the salary and dividend planning must account for the full picture.
A salary above £50,270 starts using the 40% income tax band, which is generally less efficient than paying 35.75% dividend tax on the same income at higher rate. Very few directors take salary above the higher rate threshold unless there are specific non-tax reasons.
A salary below £5,000 can still make sense in specific cases: where the company is in loss, where you have already used your personal allowance from other sources, or where the company is in the marginal relief band and the salary interacts poorly with other deductions.
Model the salary as part of your total extraction strategy, not in isolation. The salary vs dividend calculator on this site lets you adjust salary and dividends together so you can see the combined personal take-home and retained profit at each combination.
No. The right salary depends on company profit level, the applicable corporation tax rate, your personal tax position, other income sources and non-tax factors like mortgage income evidence.
Yes, above £5,000. Employer NI at 15% applies to salary above the secondary threshold of £5,000. A salary of £12,570 creates employer NI of approximately £1,139.
A salary of at least £6,708 (the lower earnings limit for 2026/27) qualifies as a contributory year for State Pension purposes, even if no NI is actually paid. Worth bearing in mind when setting a very low salary.
Rarely. At higher extraction levels, salary is less efficient than salary plus dividends because dividends carry no NI and attract lower tax rates than income tax above the basic rate threshold.
The rates and rules on this page are drawn from the official UK government sources below, using the confirmed 2026/27 figures. Each link opens the relevant HMRC, GOV.UK or Companies House page in a new tab.
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.