Directors of every company want to ensure that they achieve the most from the success of their business, which is why careful consideration needs to be given to how they are paid.

If we look at the current rules, the most tax-efficient salary for directors in the 2025/26 tax year is £12,570 per year, which works out to £1,047.50 per month or £241 per week.

Why £12,570 is the optimal salary

The main reason £12,570 is the most efficient salary comes down to how National Insurance (NI) and personal tax allowances are structured:

• The lower earnings limit for NI in 2025/26 is £6,500 per year. Earning above this ensures that the year counts toward your future state pension entitlement.
• The primary earnings limit for NI is £12,570 per year. If your salary exceeds this, you (as the employee) would need to start paying NI contributions.
• The secondary earnings limit for NI is £5,000 per year. If you pay yourself more than this, the company (as the employer) must pay employers NI at 15%.

Why is a salary of £12,570 so tax efficient

By paying your directors a salary of £12,570 you can ensure that you:

✅Qualify for a full state pension year.
✅ Avoid paying employee NI contributions.
✅ Maximise corporation tax savings, which offsets the cost of employers’ NI.

At £12,570, the employer will need to pay £1,136 in NI (calculated as £7,570 × 15%).

However, this is outweighed by the Corporation Tax savings, which range from £1,654 to £2,307, depending on the rate of Corporation Tax that you pay, which can range from 19% to 25%.

Why not pay a higher salary?

Once you exceed the Personal Allowance of £12,570, income tax and employee NI start applying, leading to a combined tax rate higher than the dividend tax rate.

Dividend tax rates (starting at 8.75%) remain lower than the combined income tax and NI rates, making dividends the more efficient way to withdraw additional income.

Why not pay a £nil salary?

A £nil salary means the company loses out on the Corporation Tax deduction.

You would also miss out on a qualifying year toward your state pension unless you have other sources of NI contributions.

Paying £12,570 allows you to reduce your Corporation Tax liability and secure a pension year without paying personal NI.

When to pay a higher salary

There are a few situations where paying more than £12,570 might make sense:

• If the director has a contract of service (e.g., under minimum wage rules).
• If dividends are not possible because the company has insufficient profits or past losses.
• If the director is of pension age (since employee NI would not be due).

When to pay a lower salary

In previous years, the recommended salary was around the secondary NI threshold. In 2025/26, this is £5,000.

• Paying £5,000 avoids both employee and employer NI.
• However, the corporation tax savings on a £12,570 salary exceed the employers’ NI cost, so £12,570 remains more tax-efficient.

The impact of the Employment Allowance

From April 2025, the Employment Allowance increases to £10,500. If your company is eligible, the £1,136 of employers’ NI would be reduced to £0, increasing the tax benefit of paying a salary of £12,570.

However, sole director companies without other employees do not qualify for the employment allowance.

Best approach for sole directors

For sole directors without other employees, the employers NI cost of £1,136 would normally suggest lowering the salary to £5,000.

However, paying £12,570 still results in greater overall savings due to the corporation tax reduction.

Sole directors should, therefore, still aim for a monthly salary of £1,047.50.

Timing of NI Payments

There are two methods for calculating directors’ NI:

1. Monthly calculation – NI liability starts from month one.
2. Annual calculation – NI only applies once cumulative earnings exceed £5,000, which happens around month five with a £12,570 salary.

Both methods result in the same total NI due of £1,136, but the annual method delays payment until later in the year.

Employing a Partner or Staff Member

If you employ a second person (such as a partner), the business could become eligible for the Employment Allowance, eliminating the employers’ NI cost.

Partners performing administrative or support duties (e.g., invoicing or bookkeeping) could justify employment status.

Employment regulations would need to be followed, so professional advice is recommended.

What Was the Optimum Salary in 2024/25?

The optimum salary for 2024/25 was also £12,570 because the tax and NI thresholds have remained unchanged.

How to set up and report your salary

To pay yourself a director’s salary, you need to:

1. Register for PAYE with HMRC.
2. Report your salary using payroll software.
3. Ensure proper filing with HMRC.

Best strategy for director income in 2025/26

Below is a summary of the best approach for director income in the new tax year:

1. Pay a salary of £12,570.
2. Take additional income as dividends, as dividend tax rates are lower than combined PAYE/NI rates.
3. First £500 of dividends are tax-free (dividend allowance).
4. Dividends up to £37,200 are taxed at 8.75% (basic rate).
5. Higher dividend rates apply at 33.75% (higher rate) and 39.35% (additional rate).

Example:

A director earning £50,270 (salary + dividends) would have a total tax liability of £3,255, an effective rate of 6.5%.

Final thoughts

The most tax-efficient salary for directors in 2025/26 remains £12,570 per year.

This approach reduces corporation tax liability, qualifies for state pension, and avoids personal NI costs while allowing additional income to be drawn tax-efficiently as dividends.

For personalised advice tailored to your situation, please get in touch with us.  Please ask to speak to @Melissa Foster or @Tierney Mason