Home / Director salary: how to think about the right amount
Director salary decisions affect the company and the person simultaneously. A salary that looks optimal at the personal level may create unexpected employer NI costs. A salary set purely to minimise NI may leave the director with a weaker income record or a less efficient overall extraction. The right answer depends on the full extraction picture, not just one layer of it.
£12,570 is the personal allowance for 2026/27 — the amount a person can earn before paying income tax. Taking a salary at exactly the personal allowance means the director pays no income tax on the salary, making it effectively a tax-free extraction from the company.
The complication is employer National Insurance. 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). This is a real cost to the company, though it is itself deductible from company profit before corporation tax.
The net saving from a £12,570 salary compared to taking no salary depends on the corporation tax rate. 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. Against this, the director receives £12,570 tax-free (assuming no other income above the personal allowance). For many owner-managers, this remains an efficient approach.
Some directors choose to set salary at exactly £5,000 — just at the secondary threshold — to avoid triggering any employer NI while still making a corporate expense deduction. This approach saves the employer NI cost (approximately £1,139 at £12,570 salary) but means the director leaves £7,570 of personal allowance unused.
The trade-off: at the 19% small profits rate, the corporation tax saving from a £12,570 salary versus a £5,000 salary is approximately £1,305 after accounting for the employer NI cost. Against this, the £12,570 salary gives the director a larger official income — which can matter for mortgage applications, credit assessments and future pension contribution calculations.
Neither approach is universally correct. The right choice depends on whether the corporation tax saving outweighs the NI cost (it often does at higher corp tax rates), and whether the director values the higher declared income for non-tax reasons.
Director salary is taxed through PAYE. The director pays employee NI at 8% on salary between £12,570 and £50,270 (2% above £50,270) and income tax at the applicable rate. For salary at exactly £12,570, employee NI and income tax are both zero assuming no other personal income above the allowance.
The salary creates a gap between the personal allowance used (£12,570) and the higher rate threshold (£50,270). Most directors fill this gap with dividends, which are taxed at the basic dividend rate of 10.75% above the £500 dividend allowance. The combination of a tax-free salary plus basic-rate dividends is usually more efficient than taking all income as salary.
Where a director has significant other personal income — from a second employment, property income or a partner's income affecting their own position — the salary and dividend planning must take the full picture into account.
A salary above £50,270 starts to use 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 choose to take salary above the higher rate threshold unless there are specific non-tax reasons to do so.
A salary below £5,000 may still make sense in specific circumstances — for example, where the company is in loss, where the director has already used their personal allowance from other sources, or where the company is in the marginal relief band and the salary interacts poorly with other deductions.
The key principle is to model the salary as part of the 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.
The homepage calculator is the fastest way to turn this guidance into a concrete estimate for company tax, dividends and personal take-home.
No. The right salary depends on company profit level, the applicable corporation tax rate, the director's personal tax position, other income sources and non-tax considerations such as income evidence for mortgages.
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.
Salary of at least £6,396 (the lower earnings limit for 2026/27) qualifies as a contributory year for State Pension purposes, even if no NI is actually paid. This is worth bearing in mind when setting a very low salary.
Rarely. At higher extraction levels, salary is usually less efficient than a combination of salary and dividends because dividends are not subject to National Insurance and attract lower dividend tax rates than income tax above the basic rate threshold.