If you run your own company, you’ll know there are several ways to extract profits. One of the most common strategies is to pay yourself a small salary and then take additional profits as dividends. This is often the most tax-efficient approach — but salary plays another important role too.
A salary ensures you secure a qualifying year for your State Pension and certain benefits. And if you don’t yet have 35 qualifying years, this could make a big difference to your retirement income.
Why Do Qualifying Years Matter?
To receive the full State Pension, you need 35 qualifying years of National Insurance contributions or credits. You’ll need at least 10 qualifying years to receive a reduced pension.
Since dividends don’t count for National Insurance, paying yourself a salary (or a bonus) can help build up your record and protect your future pension entitlement.
How Much Salary Is Enough?
For a year to count as a qualifying year, your earnings must reach at least 52 times the Lower Earnings Limit (LEL).
- For 2025/26, the LEL is £125 per week.
- That means you need a salary (or bonus) of at least £6,500 over the year to secure a qualifying year.
What About National Insurance?
Here’s where it gets interesting:
- If your earnings are between the LEL (£6,500 annually) and the Primary Threshold (£12,570), you’ll qualify for State Pension purposes but won’t actually have to pay any employee Class 1 NI. It’s recorded at a zero rate, so you get the benefit without the cost.
- However, your company (as the employer) may face a liability. From 6 April 2025, the Secondary Threshold drops to £5,000. This means paying a salary of £6,500 will trigger an employer’s NI bill of £225.
Important: If your company doesn’t qualify for the Employment Allowance (for example, if you’re the sole director and only employee), you’ll have to pay that employer’s NI.
In a family company where the Employment Allowance is available, you can often avoid this additional cost.
Is It Worth Paying More?
Although £6,500 is enough for a qualifying year, if you’ve got your full Personal Allowance available (£12,570 in 2025/26), it can be more tax efficient to pay yourself a salary up to that level.
Why? Because the corporation tax deduction on your salary (and any employer’s NI due) usually outweighs the extra NI bill — meaning your company could actually save tax overall.
Final Thoughts
Getting the balance right between salary and dividends isn’t just about saving tax today — it’s also about looking after your future. Paying yourself enough salary to secure a qualifying year is a smart move if you don’t yet have 35 years on your record.
Need Advice on Salary and Dividends?
At Jon Davies Accountants, we help business owners like you make the right choices to maximise tax efficiency while protecting future benefits like the State Pension.
Contact Jon and the team today to review your salary and dividend strategy and make sure you’re on the best path forward.
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Any questions?
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