DirectorsUpdated 2026-02-12

What is the most tax-efficient salary for directors in 2025/26?

Quick Answer

The most tax-efficient director's salary in 2025/26 is typically £12,570 (the personal allowance). This uses your full tax-free allowance while keeping NI costs low.

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Detailed Explanation

Optimal director's salary for 2025/26

The most tax-efficient salary depends on your company's situation, but for the majority of single-director limited companies, the answer is £12,570 per year (the personal allowance).

Why £12,570 works best

At this salary level: - You pay zero Income Tax (salary equals the personal allowance) - You pay zero employee NI (earnings below the primary threshold of £12,570) - Your company pays employer NI of 15% on the amount above the secondary threshold (£5,000), which is approximately £1,136 - The salary is a deductible business expense, saving Corporation Tax of £2,517-£3,143 (at 19-25%) - You qualify for State Pension credits

The maths for 2025/26

Salary: £12,570 - Income Tax: £0 - Employee NI: £0 - Employer NI: (£12,570 - £5,000) x 15% = £1,136 - Total cost to company: £13,706 - Corporation Tax saved: £13,706 x 25% = £3,427 (or x 19% = £2,604) - Net cost after CT relief: £10,280-£11,102

Alternative: £5,000 salary (secondary threshold)

Some directors prefer a salary of £5,000 to avoid all NI entirely: - Income Tax: £0 - Employee NI: £0 - Employer NI: £0 - Still qualifies for State Pension (above Lower Earnings Limit of ~£6,500 needs checking, but £5,000 may still qualify) - Lower Corporation Tax deduction

When a higher salary makes sense

  • You have a **student loan** to repay (threshold is £27,295 for Plan 2)
  • You need **higher pensionable earnings** for pension calculations
  • Your company is **loss-making** (salary creates a bigger loss to carry forward)
  • You have other employees and qualify for the **£10,500 Employment Allowance**
  • You need to demonstrate higher personal income for a **mortgage application**

Key 2025/26 changes

From April 2025: - Employer NI rate increased from 13.8% to 15% - Employer NI threshold dropped from £9,100 to £5,000 - This makes the gap between £5,000 and £12,570 salary cost more in employer NI than before - But the Corporation Tax saving still outweighs the NI cost for most directors

Bottom line

For most profitable single-director companies, £12,570 salary plus dividends remains the optimal strategy in 2025/26, despite the employer NI increases.

Source: HMRC Tax Rates 2025/26

Real-World Examples

Single Director with No Other Income

Sarah runs a small marketing consultancy. She has no other income sources. Taking a salary of £12,570 allows her to utilise her full personal allowance, minimising her overall tax burden. The company will pay employer's NI only on the portion of her salary above the secondary threshold.

Director with Significant Outside Income

John also works part-time in a PAYE role earning £30,000. Taking the £12,570 salary would push him further into a higher tax bracket. In John's case, it may be more tax-efficient to take a minimal salary to avoid further income tax and rely primarily on dividends.

Husband and Wife Directors

Mark and Lisa are both directors of their software development company. They can each draw a salary of £12,570, utilizing both of their personal allowances. This reduces the company's corporation tax liability while minimising personal income tax and employee NI contributions for both directors.

Common Mistakes to Avoid

  • Assuming the optimal salary is the same every year without checking the updated personal allowance.
  • Forgetting to factor in other sources of income when determining the most tax-efficient salary.
  • Paying yourself a salary significantly below the personal allowance and missing out on utilising your tax-free earnings.
  • Ignoring the employer's National Insurance liability when calculating the true cost of your salary.

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

You'll start paying income tax at your marginal rate (20%, 40%, or 45%) on the amount exceeding £12,570. You'll also pay employee's National Insurance contributions on earnings above the NI threshold.

Does the £12,570 salary affect my ability to claim expenses?

No, your ability to claim allowable business expenses is separate from your salary. You can still claim legitimate business expenses to reduce your company's corporation tax, regardless of your salary.

How often should I pay myself this salary?

You can pay yourself monthly (approximately £1,047.50 per month) or in a single annual payment. Monthly payments are generally easier for budgeting and cash flow management.

Where does the threshold for employer NI start in 2025/26?

The threshold for employer NI is different from the personal allowance and may change yearly, confirm with HMRC or your accountant. You'll be liable for employer's NI contributions at 15% on the portion of your salary above that threshold.

Practical Tips

  • Use accounting software like AccountsOS to automatically calculate and track your salary, tax, and National Insurance liabilities.
  • Before the start of the 2025/26 tax year, review your personal circumstances and projected company profits to determine if the £12,570 salary remains optimal for you.
  • Consult with a qualified accountant or tax advisor to get personalized advice tailored to your specific financial situation and business structure.
  • Keep accurate records of all salary payments and deductions to ensure compliance with HMRC regulations.

Related Questions

How much salary should I pay myself as a director?

Most directors pay themselves a salary of £12,570 per year (the personal allowance) or £9,100 (the secondary NI threshold) and take the rest as dividends for optimal tax efficiency.

How much dividend can I take from my company?

You can take dividends up to your company's available profits (retained earnings). There's no legal maximum, but you'll pay dividend tax above the £500 dividend allowance.

How does National Insurance work for company directors?

Directors pay NI on earnings above £12,570/year (primary threshold). Rate is 12% on earnings between £12,570 and £50,270, then 2% above. Employers pay 13.8% on earnings above £9,100.

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