Director's Salary 2026/27: What's the Most Tax-Efficient Salary to Pay Yourself?
- Natalia Streeter
- 12 hours ago
- 10 min read
Choosing a director’s salary is one of those small payroll decisions that can have a big effect on tax, National Insurance, Corporation Tax and even future State Pension entitlement.
For many UK limited company directors, the familiar answer is to take a modest salary and top up income with dividends. That can still work well, but the best figure is not the same for every company or every director. The right answer depends on profits, other income, whether the company can claim Employment Allowance, how many directors or employees are on payroll, and the director’s wider personal tax position.
This guide explains the main 2026/27 thresholds, compares common salary strategies, and shows why personalised advice matters. It is general information only, not personalised tax advice.
The key 2026/27 tax thresholds directors need to understand
Before deciding on a director salary 2026/27 figure, it helps to know which thresholds drive the calculation.
Some 2026/27 rates and allowances may still be subject to future Budget changes, so always check the final HMRC position before running payroll. The following are the key areas most owner-managed companies need to watch.
Threshold or tax area | Why it matters for directors |
Personal Allowance | This is the amount of income an individual can usually receive before paying Income Tax. The standard Personal Allowance is £12,570, although it is reduced when income exceeds £100,000. |
National Insurance Lower Earnings Limit | Earnings at or above this level can help build a qualifying year for State Pension purposes, even if no employee National Insurance is actually paid. |
Employee National Insurance Primary Threshold | Employee National Insurance normally starts once salary exceeds this level. For many directors, keeping salary at or below this threshold avoids employee NI. |
Employer National Insurance Secondary Threshold | Employer NI starts once salary exceeds this level, unless relief such as Employment Allowance covers it. |
Employer National Insurance rate | Employer NI is a company cost. From recent rules, many small companies have had to pay closer attention to this because the secondary threshold is lower than the Personal Allowance. |
Employment Allowance | This can reduce an eligible employer’s National Insurance bill. It can change the most efficient salary level. Not all companies qualify. |
Corporation Tax | Salary and employer NI are usually deductible business expenses, reducing taxable company profits. Dividends are not deductible for Corporation Tax. |
For 2026/27, small companies also need to keep the Corporation Tax bands in mind. The small profits rate is 19% for companies with taxable profits up to £50,000, and the main rate is 25% for profits over £250,000. Companies between those levels usually face marginal relief, which creates an effective rate between 19% and 25%.
That matters because salary can reduce company profits before Corporation Tax is calculated. A company paying Corporation Tax at a higher effective rate may receive a larger Corporation Tax saving from paying salary than a company with low profits.
Why there is no single best director salary for every company
A common mistake is to search for a standard tax efficient director salary and apply it without checking the wider picture. That can work in simple cases, but it can also lead to unnecessary tax, missed National Insurance credits, or a salary that does not match the company’s profits.
The best level often depends on these factors.
Other employment income can use up the Personal Allowance
If a director also has a job elsewhere, that employment may already use some or all of the Personal Allowance and National Insurance thresholds.
For example, a director who earns £40,000 from another job may not benefit in the same way from taking a £12,570 salary from their own company. The additional salary could be taxed at their marginal Income Tax rate, and National Insurance may also be due depending on the circumstances.
By contrast, a full-time owner-director with no other income may be able to use more of their Personal Allowance through company payroll.
Employment Allowance can change the answer
Employment Allowance can reduce the company’s employer National Insurance bill, but eligibility is not automatic.
A company with only one employee who is also the sole director usually cannot claim Employment Allowance. A company with other employees, or in some cases more than one director on payroll, may be able to claim, subject to the detailed rules.
This matters because employer NI can be the main cost of paying salary above the secondary threshold. If Employment Allowance covers that employer NI, paying a salary up to the Personal Allowance can often be more attractive.
Company profits affect the Corporation Tax saving
Salary is normally an allowable business expense. That means it reduces company profits before Corporation Tax.
If the company is profitable, the Corporation Tax saving can partly offset the salary cost and any employer NI. If the company has low profits or losses, the immediate tax benefit may be lower or deferred.
A company with profits around the marginal Corporation Tax band may also need more careful planning, because reducing profits could produce a stronger Corporation Tax saving than expected.
Multiple directors need joined-up planning
For husband-and-wife companies, family companies or businesses with several working directors, the best answer may be different for each person.
One director may have no other income and a full Personal Allowance available. Another may earn rental profits, pension income or employment income elsewhere. One may need a qualifying NI year, while another may already have enough contributions.
A single salary figure for everyone may be simple, but it is not always the most efficient.
Common director salary strategies for 2026/27
There are a few salary levels that often come up in planning conversations. The right one depends on the director and the company.
Taking no salary
Some directors take no salary and extract profits only through dividends. This keeps payroll simple and avoids PAYE administration, but it can be a false economy.
The main drawback is National Insurance. If no salary is paid, the director may not receive a qualifying year towards the State Pension through that company. Over time, missing qualifying years can reduce future entitlement unless the director has credits from another source.
Taking no salary also means the company misses out on a potential Corporation Tax deduction.
Taking a salary around the Lower Earnings Limit
A salary at or above the Lower Earnings Limit can help secure a qualifying National Insurance year, even where no employee NI is payable because earnings remain below the employee NI threshold.
This can be useful where the director wants to protect State Pension entitlement but keep payroll costs low.
The point to watch is employer NI. If the salary exceeds the employer NI secondary threshold, the company may have employer NI to pay unless Employment Allowance is available.
Taking a salary up to the employer NI threshold
Some companies choose a salary that stays below the employer NI secondary threshold. This avoids employer NI, but the salary may be too low to create a qualifying NI year if it sits below the Lower Earnings Limit.
That can work for a director who already has NI credits from another job or other source. It may be less suitable for someone relying on the company salary to build State Pension entitlement.
Taking a salary up to the Personal Allowance
A salary of £12,570 is often discussed because it uses the standard Personal Allowance, assuming the director has no other income using it up.
The benefits can include:
no Income Tax on that salary if the Personal Allowance is available
no employee NI if the salary stays within the relevant threshold
a Corporation Tax deduction for the company
a potential qualifying NI year
The downside is employer National Insurance if the salary exceeds the secondary threshold and the company cannot use Employment Allowance. Even then, the Corporation Tax saving may partly offset the cost, so the answer needs a proper calculation.
Salary and dividends are taxed differently
Many small limited company directors use a mix of salary and dividends. This is common because each type of income is taxed in a different way.
Salary is paid through PAYE. It is usually deductible for Corporation Tax, but it can trigger employee and employer National Insurance once thresholds are crossed.
Dividends are paid from post-tax company profits. That means the company pays Corporation Tax first, then distributes remaining profits to shareholders. Dividends do not attract National Insurance, but they are taxable personally once dividend income exceeds the available dividend allowance and tax bands.
In simple terms:
Income type | Company tax treatment | Personal tax treatment |
Salary | Usually reduces Corporation Tax profits | Taxed as employment income, with possible employee and employer NI |
Dividends | Paid from profits after Corporation Tax | Taxed at dividend tax rates, with no National Insurance |
This is why the classic approach is a modest salary plus dividends. The salary can use allowances, support NI credits and reduce Corporation Tax. Dividends can then extract further profits without National Insurance.
But the balance needs care. A company must have sufficient distributable profits before paying dividends. Dividends also need proper paperwork, including board minutes and dividend vouchers. Paying money out and calling it a dividend later can cause problems if the company did not have enough profits at the time.
Plain English examples of how the best salary can differ
These examples are simplified. They show the thinking, not a personalised recommendation.
Example one is a sole director with no other income
Amira runs a profitable limited company and has no other income. She is the only director and there are no employees.
Her company may not be eligible for Employment Allowance if she is the sole employee and director. If she takes a salary above the employer NI threshold, the company may pay employer NI.
Even so, salary can still reduce Corporation Tax and help Amira secure a qualifying NI year. Her accountant would compare the employer NI cost with the Corporation Tax saving and the dividend tax effect before choosing the salary figure.
Example two is a company with two working directors
Ben and Priya run a company together. Both work in the business and both are on payroll.
Depending on the detailed rules, the company may be eligible for Employment Allowance. If employer NI is covered by the allowance, salaries up to the Personal Allowance may be more attractive, assuming both directors have their allowances available.
If Priya also has rental income or employment income elsewhere, her best salary may be different from Ben’s.
Example three is a director with another job
Chris has a full-time job and runs a small limited company on the side. His employment already uses his Personal Allowance and basic-rate band.
Taking a salary from the company could create extra PAYE tax and may not deliver the same benefit as it would for someone with no other income. Dividends might still be sensible, but Chris needs to consider dividend tax rates and total income across the year.
Example four is a company with low profits
Dana’s company is new and has modest profits. A higher salary may create a loss or reduce profits to a very low level.
That is not automatically wrong, but it changes the planning. If there is little Corporation Tax to save now, the immediate benefit of salary may be lower. Cash flow also matters. Payroll taxes need paying on time, even when customers are slow to pay.
Why taking no salary can cost more than expected
Avoiding salary can feel tidy. There is no PAYE to run, no monthly payroll entry, and no employer NI to think about.
The hidden cost is often the National Insurance record.
To receive the full new State Pension, an individual normally needs enough qualifying years on their NI record. A director who takes dividends only may not build those years through the company. If they do not receive credits elsewhere, they could have a gap.
A small salary at the right level can preserve that qualifying year without necessarily creating employee NI. This is one reason payroll planning should not focus only on this year’s tax bill.
The most efficient salary is not just the lowest tax figure. It should also protect allowances, pension credits, company cash flow and future planning.
Practical steps before setting a director salary
Before deciding on a salary for 2026/27, review the whole picture.
Useful questions include:
Does the director have other employment income, pension income, rental profits or self-employment income?
Is the full Personal Allowance available?
Will the salary create a qualifying National Insurance year?
Can the company claim Employment Allowance?
How many directors and employees are on the payroll?
Is the company profitable enough to benefit from Corporation Tax relief?
Are dividends supported by distributable profits?
Will total income push the director into higher-rate tax or reduce the Personal Allowance?
A quick annual review before the first payroll of the tax year can prevent problems later.
FAQs about director salaries in 2026/27
What is the most tax-efficient salary for a limited company director in 2026/27?
There is no single figure that suits every director. Many companies consider salaries around the Lower Earnings Limit, employer NI threshold or Personal Allowance, but the best choice depends on other income, Employment Allowance, company profits and National Insurance planning.
Should I take salary or dividends from my limited company?
Many owner-directors take both. Salary can use allowances, support National Insurance credits and reduce Corporation Tax. Dividends can be efficient for extracting post-tax profits, but they must be paid from available profits and are taxed personally.
Can I take no salary and only dividends?
Yes, if the company has sufficient distributable profits and you are a shareholder. But taking no salary may mean missing a qualifying National Insurance year towards the State Pension, unless you receive credits elsewhere.
Does Employment Allowance affect my director salary?
Yes. If the company qualifies, Employment Allowance can reduce or remove employer National Insurance costs. That can make a higher salary more attractive. Sole director companies with no other employees often need particular care because they may not qualify.
Do I need payroll if I only pay a small director salary?
Usually, if a salary is paid at reportable levels or tax needs to be deducted, the company should operate PAYE correctly and file payroll submissions with HMRC. An accountant can confirm what is needed for your salary level.
Get personalised director remuneration advice
The best salary and dividend mix should be based on real numbers, not a standard figure copied from a tax checklist. A small change in salary can affect Income Tax, National Insurance, Corporation Tax, dividend planning and State Pension credits.
Beyond Bookkeeping Accountants can help limited company directors plan director remuneration, run payroll, prepare dividend paperwork, review Corporation Tax and keep year-end accounts in order.
For tailored advice based on your company and personal tax position, contact Beyond Bookkeeping Accountants about limited company accounting and payroll support.
The right approach for 2026/27 is the one that fits your income, your company profits and your long-term plans. General guidance is useful, but personalised advice is what turns it into a confident decision.
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