One of the most common questions we hear from UK limited company directors is: “What’s the most tax-efficient salary to pay myself?” Every tax year brings new thresholds, new allowances, and the same old confusion. In 2025–26, our go-to starting point for most directors is £12,570, and here’s why.
- Protecting Your State Pension
Above all else, the salary you draw must safeguard your state pension credits. Each tax year you earn above the Lower Earnings Limit (around £6,500), you’ll qualify for a ‘stamp’ towards your future state pension. If you were to pay yourself less than that—say, just £5,000—you’d dodge National Insurance (NI) on the employer side (especially if you’re a sole director who can’t claim Employment Allowance). However, you’d also miss out on accruing a qualifying year towards your state pension. That short-term NI saving could lead to a far bigger loss down the line.
At £12,570, you meet the threshold to get your full NI credits, and you stay within your Personal Allowance—so the salary itself is tax-free. In other words, you protect your future pension while keeping your personal tax bill at zero on that slice of income.
- Maximising the Personal Allowance
Your Personal Allowance of £12,570 is the largest single tax-free amount you can earn in a year. Wasting any of it leaves money on the table—money that could have reduced your company’s Corporation Tax bill. Because salary is a deductible expense, paying yourself up to £12,570 lowers your company’s taxable profits.
Yes, if you’re a sole director, any part of the salary above £5k might attract employer NI at 15%. But if you have one or more team members (meaning you can claim the £10,500 Employment Allowance in 2025–26), that extra employer NI can often be offset, allowing you to maximise the Personal Allowance salary with little or no NI cost to the business. But, then again, if you have a few employees who have already mopped up the Employment Allowance, you’re back to the position of a sole director.
- Dividends Are Still Part of the Mix
Of course, dividends remain a director’s best friend. They aren’t subject to NI, and although the tax-free dividend allowance has been cut to £500, dividends above that figure are typically taxed at lower rates than salary (once you’ve used your Personal Allowance). So after you’ve drawn a £12,570 salary, you’ll likely want to take further profits as dividends—especially if this keeps you in a lower tax band.
- One Size Doesn’t Fit All
We recommend £12,570 as a starting point, but the right balance between salary and dividends varies with company profits, other personal income, pension plans, and more.
The variable Corporation Tax rate depending on company profits will affect the tax relief on you salary.
If you earn significantly above £100,000 (including your salary and dividends), your Personal Allowance starts to taper away.
If you’re the only person on the payroll or have a few employees, Employer NI thresholds kick in sooner, leaving you without the Employment Allowance.
And if you’re in the higher or additional-rate bracket, strategic pension contributions can help you dodge hefty tax rates.
It also does depend on personal preference. Some people prefer 100% salary as there’s no messing around with dividends, Director Loans, and Self-Assessments. The extra tax is worth avoiding the hassle. And that’s OK – it is a personal choice.
- Personalised Scenario Planning
In short, director remuneration in 2025–26 is about extracting profits while respecting thresholds—and we believe £12,570 is the sweet spot for many small businesses.
Still, the devil is in the detail, and we offer personalised scenario planning for a fee. By mapping out exactly how salary, dividends, and even pensions interact with your unique circumstances, we can pinpoint the most efficient structure for you and your company.
We recently did for this for one client who will save over £11,000 following a personalised dividend/salary planning due to some very specific circumstances.
Want to make sure you don’t overpay tax—or miss out on valuable state pension credits? Let’s explore your specific scenario together.
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