The Most Tax-Efficient Director’s Salary in 2025/26

If you run your own limited company, one of the biggest financial decisions you’ll make is how much to pay yourself. Unlike a sole trader, you can’t just dip into your business profits whenever you want. As a company director, you have to decide whether to take money out as a salary, dividends, or a mix of both. A mix of both is usually the most effective way.

Getting this wrong could mean paying unnecessary tax and National Insurance. Getting it right means you’ll keep more money for yourself while still staying compliant with HMRC.

This guide breaks down, in simple terms, everything you need to know about director’s pay in 2025/26, including:

• NAVIGATION

  • Salary vs Dividends: How Directors Get Paid

  • What does National Insurance mean for a director’s salary?

  • National Insurance thresholds explained

  • Optimising your director’s salary for State Pension

  • Do you pay tax on dividends?

  • Are director’s salaries an allowable expense for Corporation Tax?

  • How does the Employment Allowance affect a director’s salary?

  • Director’s salaries – how much should I pay myself?

  • Summary table: Director’s salaries in 2025/26

  • What is the best salary for a sole director?

  • Key assumptions in our salary examples

  • Salary options for sole directors

  • Salary options for two or more directors

  • Appointing a family member as a director

  • What if I already have another source of income?

  • What if I delay taking a director’s salary?

    
    

Salary vs Dividends: How Directors Get Paid

If you’re a director of a limited company, you’re technically both an employee and an employer of your own business. That dual role is important because it directly affects how you pay yourself in the most tax-efficient way.

Here’s why it matters:

• Salary vs dividends: Salary payments are subject to National Insurance Contributions (NICs) from both the employer (your company) and the employee (you). Dividends, however, are not subject to NICs, which often makes them a more tax-efficient way of taking income.

• Why take a salary at all? A salary gives you a steady, predictable income throughout the year. Plus, because company directors are treated as “office holders,” you’re legally allowed to pay yourself below the minimum wage without breaking any employment rules.

• The balancing act: The key is finding the right mix of salary and dividends so you remain tax efficient while still building up entitlements, like qualifying years for the State Pension.

  
  

When deciding how much to pay yourself as a company director, you’ll need to weigh up:

• The cost of National Insurance (as both employer and employee).

• Whether you want to make qualifying salary payments for future State Pension entitlement.

• How many directors or employees are on the payroll (this can affect allowances like the Employment Allowance).

• Your dividend allowance and how much profit the company has available to distribute.

• Your personal income tax allowance and the different tax bands.

• Corporation Tax relief available on employee salaries.

  
  

Getting the balance right means you keep more of what you earn, stay compliant with HMRC rules, and plan ahead for both tax and retirement.

What does National Insurance mean for a director’s salary?

When you pay yourself a salary from your limited company, both you (as the employee) and your company (as the employer) may have to pay National Insurance.

The complication is that the thresholds are different for each:

• Primary Threshold (Employee NI): Once your salary goes above this level, you personally start paying National Insurance.

• Secondary Threshold (Employer NI): Once your salary goes above this level, your company must also pay employer’s National Insurance on your earnings.

In practice, this means that once you cross both thresholds, the same salary is hit by National Insurance twice, once on the employee side and once on the employer side. That’s why directors sometimes keep their salaries below these levels.

For reference, the National Insurance thresholds for both 2024/25 and 2025/26 are shown in the table below. You’ll notice that employers actually start paying NI contributions earlier than employees do. tax efficient director’s salary 2025/26

Employer and Employee National Insurance Thresholds

How does National Insurance affect a director’s salary?

The tricky part with National Insurance is that the thresholds for employers and employees are different. In fact, employers start paying NI at a lower level than employees.

Here’s what that means in practice:

• Below the Lower Earnings Limit (LEL): No NI is paid, and you don’t build up any NI benefits (like State Pension credits).

• Between the LEL and the Primary Threshold: You don’t pay NI, but you do still earn NI credits, so these earnings count towards your State Pension.

• Above the Primary Threshold: Employees start paying NI on their salary.

• Above the Secondary Threshold: Employers also start paying NI on your salary.

This is why the thresholds matter when deciding on the most tax-efficient director’s salary.

	Weekly Threshold 2024/25	Annual Threshold 2024/25	Weekly Threshold 2025/26	Annual Threshold 2025/26
Lower Earnings Limit (LEL)	£123	£6,396	£125	£6,500
Primary Threshold: Employees pay NI at a rate of 8% on earnings above the threshold.	£242	£12,570	£242	£12,570
Secondary Threshold: Employers make NICs on earnings above the threshold. 2024/25: 13.80% 2025/26: 15.00%	£175	£9,100	£96	£5,000
Upper Earnings Limit (UEL): Employees pay NI at a rate of 2% on earnings above the UEL.	£967	£50,270	£967	£50,270

Optimising Your Director’s Salary for State Pension

Can I use the tax-free Personal Allowance on my director’s salary?

Yes! As a company director, you can use your tax-free Personal Allowance against your salary. The Personal Allowance is the amount you can earn before paying any income tax.

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For the 2025/26 tax year, the Personal Allowance is £12,570. This means you only pay tax on income above that level.

Example: If you earn £14,000 in a year, you'll only pay income tax on £1,430 of it. This is because:

£14,000 (salary) - £12,570 (tax free personal allowance) = £1,430.

This year the Primary Threshold (when you start paying National Insurance as an employee) is the same amount at the tax free personal allowance.

So, if you take a salary from your limited company which is below the Primary Threshold, you won’t pay tax or NI on it as an employee.

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Do you pay tax on dividends?

Yes, dividends are not subject to National Insurance, but they are subject to dividend tax. The tax rates for dividends are different (and usually lower) than standard income tax rates.

Dividend Allowance 2025/26

The good news is that in addition to your Personal Allowance, you also get a Dividend Allowance. For the 2025/26 tax year, this allowance is £500.

This means the first £500 of dividend income you receive is completely tax-free. Anything above that will be taxed at the dividend tax rates that apply to your income band.

Are director’s salaries an allowable expense for Corporation Tax?

Yes, salaries are classed as an allowable business expense when working out your company’s Corporation Tax.

A limited company pays Corporation Tax on its profits. By claiming tax relief on allowable expenses, you reduce the level of profit, which in turn lowers the amount of Corporation Tax due.

This means that:

✅Director’s salaries are deductible for Corporation Tax purposes.

✅Employer National Insurance contributions on those salaries are also deductible.

👉 In practice, paying yourself a director’s salary from your limited company not only gives you regular income but can also reduce your Corporation Tax bill in a legitimate and tax-efficient way.

How does the Employment Allowance affect a director’s salary?

The Employment Allowance can make a big difference to the most tax-efficient salary a director should take.

For the 2025/26 tax year, eligible employers can claim up to £10,500 to offset the cost of employer’s National Insurance contributions.

Who can claim the Employment Allowance?

To qualify, your company must:

• Have at least one employee or two directors on the payroll.

• Not already have another company connected to you claiming the allowance.

⚠️ This means sole directors without any other employees are not eligible to claim.

Why does this matter for director’s pay?

If your company can claim the Employment Allowance, it changes the optimum director’s salary. That’s because the company can use the allowance to cover employer’s NI contributions, making it more tax-efficient to pay yourself a higher salary than a sole director could.

👉 If you’re a sole director, the strategy is different, as you can’t rely on the allowance to offset NI costs.

Director’s salaries – How much should I pay myself from my limited company?

The most tax-efficient salary for a limited company director in 2025/26 depends on two key factors:

• Whether you are a sole director or there are multiple directors/employees in the business.

• Your own personal circumstances (such as other sources of income or use of allowances).

Because there are so many variables this year, it’s more important than ever to speak with your accountant to decide the right approach for you. But to give you a starting point, we’ve outlined the main options below.

Director’s salary summary for 2025/26

To make things easier, we’ve created a summary table showing the effect of taking a salary at different levels for directors in 2025/26. This highlights:

• How each salary level interacts with Income Tax and National Insurance thresholds

• The impact of the Personal Allowance and Dividend Allowance

• Whether the Employment Allowance applies

	Sole Director Secondary Threshold	Sole Director Lower Earnings Limit	Sole Director Primary Threshold	2+ Directors Primary Threshold
Annual salary amount	£5,000.00	£6,500.00	£12,570.00	£12,570.00
Can claim Employment Allowance	❌	❌	❌	✅
Will need to pay employer NI	❌	✅	✅	❌
Will need to pay NI as an employee	❌	❌	❌	❌
Will need to pay income tax	❌	❌	❌	❌
Will earn NI credits	❌	✅	✅	✅
Total NI to pay	£0.00	£225.00	£1,135.50	£0.00
Corporation Tax Relief Based on CT rate of 19%	£950.00	£1,227.75	£2,604.05	£4,776.60
Net tax savings	£950.00	£1,052.75	£1,468.55	£4,776.60

What is the best company salary for a sole director in 2025/26?

Working out the optimum salary for sole directors is a little more complicated, because if you’re the only person in the business you can’t claim the Employment Allowance.

This is why some directors choose to appoint another director (often a spouse or family member) so the company becomes eligible for the allowance. Doing this can make a big difference, because:

• The Secondary Threshold (when employers start paying NI contributions) fell from £9,100 to £5,000 at the start of 2025/26.

• At the same time, the Employment Allowance increased from £5,000 to £10,500.

Why this matters for directors

• As a sole director, you may need to keep your salary lower to avoid unnecessary NI costs.

• With an additional director or employee, your company may be able to claim the Employment Allowance and pay a higher, more tax-efficient salary.

The best director’s salary depends on your personal situation, but as a general guide we’ll outline three broad options below - each with their own pros and cons.

👉 Remember: every director’s circumstances are different, so always check what works best for you before deciding.

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Key assumptions in our director’s salary examples

In all of the examples we’ve outlined below, we’ve made the same assumptions so you can clearly see how the tax works in practice:

• Salary level: The director’s salary is set at or below the Primary Threshold for employee National Insurance. This means you won’t personally pay NI on your salary.

• Personal Allowance: The salary is also at or below the tax-free Personal Allowance (£12,570 for 2025/26). You won’t pay income tax on it, and any unused allowance can be offset against dividend income.

• Corporation Tax relief: The company can claim tax relief on both the salary and any employer’s National Insurance contributions it makes. This reduces the company’s overall Corporation Tax bill.

• Employer’s NI payment schedule: As the employer’s NI due is less than £1,500 per month, the company could choose to pay HMRC on a quarterly basis; even if you take your salary monthly.

👉 These assumptions provide a level playing field so you can compare the different director salary options side by side.

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Tax-efficient salary options for sole directors in 2025/26

If you’re a sole director of a limited company, choosing the right salary is all about balancing National Insurance, Corporation Tax relief, and dividends. Here are three of the most common salary levels to consider in 2025/26:

1. Salary of £5,000 per year (£416.66 per month)

• This lower salary leaves more profit available for dividends.

• It’s below the Lower Earnings Limit (£6,500), so you won’t earn National Insurance credits towards your State Pension.

• As a sole director you can’t claim the Employment Allowance, but this level of salary is exactly at the Secondary Threshold (£5,000), so your company won’t need to pay any employer’s NI.

👉 Best for directors who want to maximise dividends and keep payroll simple.

2. Salary of £6,500 per year (£541.66 per month)

• This is set at the Lower Earnings Limit, so you will earn NI credits towards your State Pension without paying employee NI.

• Because it’s above the Secondary Threshold, your company will pay employer’s NI contributions. At 15%, that works out to £225 for the year.

The good news: your company also gets Corporation Tax relief on your salary. At 19% tax, that’s worth around £1,235, which is more than enough to cover the £225 NI bill.

3. Salary of £12,570 per year (£1,047.50 per month)

• This matches both the Personal Allowance and the Primary Threshold, so you won’t pay income tax or employee NI.

• Your company will, however, pay employer’s NI contributions (about £1,135.50 for the year).

• But again, you can claim Corporation Tax relief on the full £12,570 salary. At 19%, that’s worth £2,388.30, which more than offsets the NI cost.

• You’ll also earn full NI credits towards your State Pension.

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

If your limited company has two or more directors (or at least one director and an employee) on the payroll, you become eligible for the Employment Allowance. This makes a big difference, because the allowance can be used to cover the employer’s National Insurance bill, allowing directors to take a higher salary without losing tax efficiency.

The optimum salary for two or more directors in 2025/26

For the 2025/26 tax year, the most tax-efficient salary for directors with Employment Allowance is £12,570 per year.

• This salary is at the Primary Threshold, so directors won’t pay employee National Insurance.

• Normally the company would need to pay employer’s NI above the Secondary Threshold (£5,000), but the Employment Allowance (£10,500 in 2025/26) cancels this out entirely.

• Directors also make full use of their Personal Allowance, meaning no income tax is due at this level of salary.

👉 Result: A higher, regular salary without extra NI costs, leaving more flexibility for dividends.

Appointing a family member as a company director

If you’re a sole director, you can’t claim the Employment Allowance. However, appointing a spouse or family member as a director can make the company eligible. This can:

• Reduce the company’s National Insurance bill.

• Allow both directors to take a higher salary tax-efficiently.

• Potentially make more of your household income tax-free if the other director has no other earnings.

We cover this strategy in more detail in a separate guide.

What if I already have another source of income?

The optimum director’s salary works on the basis that you have your full Personal Allowance (£12,570) available. If you’re already using your allowance through another income stream (e.g. employment elsewhere or rental income), then your director’s salary will likely be subject to both tax and NI as usual.

What if I delay taking a salary as a director?

If you register a limited company but don’t start paying yourself immediately, you can still pay a lumpsum later on in the year of the payments you would have paid yourself previously.

If a new director joins partway through the year, the National Insurance thresholds are pro-rated from their appointment date - regardless of when the company set up payroll or when payments actually began.

👉 This flexibility means you can still structure director’s pay efficiently, even if you or another director join later in the year.

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