Optimal Director Salary for 2026-27

The two salary thresholds to know

For 2026-27 there are two salary levels most directors choose between, and the right one depends on whether your company can claim the Employment Allowance.

Why £12,570 is the right answer for most directors

Let's work through the numbers. A £12,570 salary costs the company:

• Salary: £12,570
• Employer NI: (£12,570 − £5,000) × 15% = £1,135.50
• Total cost to company: £13,705.50

But that entire £13,705.50 is a tax-deductible expense. At the 19% small profits corporation tax rate, the CT saving is:

• £13,705.50 × 19% = £2,604.05 saved in corporation tax

Net cost to the company after the CT saving: £13,705.50 − £2,604.05 = £11,101.45 to put £12,570 in your pocket.

Compare that to taking the same £12,570 as a dividend: your company would first pay corporation tax on the profit (19% = £2,388.30), leaving £10,181.70 to pay out — and you would then pay dividend tax on that amount. The salary route is clearly more efficient at this level.

What about the Employment Allowance?

The Employment Allowance (£10,500 for 2026-27) lets eligible companies offset employer NI. If your company has at least one other employee (not just you as the sole director), you can claim it — and this makes the salary calculation even more favourable, as the employer NI cost is absorbed by the allowance.

Sole director companies where the director is the only person on payroll cannot claim Employment Allowance. This is an explicit HMRC exclusion. If you hire even one part-time employee, the company becomes eligible — which changes the optimal salary calculation.

Worked example: With Employment Allowance

Suppose you have one part-time employee and your company claims Employment Allowance. The £10,500 allowance offsets all employer NI on your own £12,570 salary (which is only £1,135.50). Effectively, there is no employer NI cost at all on your director salary. The full £12,570 becomes a CT-deductible cost with zero NI — making it even more efficient than the standard case above.

What happens if I pay more than £12,570?

Once salary exceeds £12,570, two extra taxes kick in on the excess:

• Income tax at 20% — you pay this personally
• Employee NI at 8% — you pay this personally (on earnings up to £50,270)

So on each extra £1,000 above £12,570, you pay £200 income tax + £80 employee NI = £280 in personal tax. The company also pays employer NI at 15% on the gross amount. The combined effective rate makes salary above the personal allowance significantly less efficient than dividends for most directors.

At higher salary levels (above ~£50,270), higher rate income tax (40%) and continued NI make salary very expensive. The optimal strategy is to take any income above £12,570 as dividends, not additional salary.

State Pension and the salary decision

To earn a qualifying year toward your State Pension, your earnings must be at or above the Lower Earnings Limit (LEL) — £6,396 for 2026-27. The £12,570 salary comfortably exceeds this, so you automatically earn a qualifying year. Directors on very low salaries should confirm they meet the LEL threshold.

You need 35 qualifying years of NI contributions for the full new State Pension (£221.20/week in 2026-27). If you have gaps in your NI record from earlier years, you can check and pay voluntary contributions via HMRC's Check Your State Pension service.

How to set and record your salary correctly

Director salary is not automatically tax-deductible — it must be properly constituted. HMRC requires:

1. A board minute recording the decision to pay a specific salary, dated before the first payment
2. Payroll registration — register as an employer with HMRC before paying salary
3. RTI submissions — file a Full Payment Submission (FPS) on or before each payment date
4. Payment from the company bank account — salary must actually be paid, not just journalled

Backdating salary — deciding in March to pay yourself a full year's salary from April — is not permitted. The decision must precede the payments.

Common mistakes

• Not registering as an employer — paying salary without registering for PAYE is non-compliant. Register at gov.uk before the first payroll run.
• Forgetting board minutes — HMRC can challenge the deductibility of salary without documentation. A one-paragraph board minute takes 2 minutes to write.
• Paying salary from a personal account — salary must come from the company account. Payments from personal funds are not company salary.
• Assuming the same salary level works every year — thresholds change. Check the Secondary Threshold and personal allowance each April.
• Ignoring the CT rate — at 25% CT (profits above £250k), the CT saving on salary is worth more. Revisit the optimal level as your company grows.