If you run your own limited company, the salary figure you set in April quietly decides your tax bill for the whole year. Set it too low and you give up state pension and pay more overall. Set it the way last year's blog posts told you to and you might still be running the £5,000 figure that costs most directors money. For 2026-27 the maths shifted again, so the number on your payroll deserves a fresh look.
TL;DR: For most limited company directors, a salary of £12,570 is the sweet spot in 2026-27. It uses your full personal allowance, builds a qualifying year toward the state pension, and the £1,135.50 of employer National Insurance it triggers is fully covered if you can claim the £10,500 Employment Allowance. Take the rest of your income as dividends, taxed at 10.75% in the basic band.
How Much Salary Should a Director Take in 2026-27?
For most directors, the answer is £12,570 a year. That matches the personal allowance, so you pay no income tax on it, and it sits at the National Insurance primary threshold, so you pay no employee National Insurance either (GOV.UK, 2026).
The salary is also a tax-deductible cost for your company, which reduces its corporation tax bill. At the 19% small profits rate, a £12,570 salary saves the company £2,388 in corporation tax before you account for any National Insurance.
There are two exceptions. If you have other taxable income that already uses your personal allowance, a lower salary may suit you better. And if your company genuinely cannot claim the Employment Allowance, the calculation is closer, though £12,570 still tends to win.
The £5,000 Salary Trap
The £5,000 figure is the secondary threshold, the point where your company starts paying employer National Insurance. Pay yourself exactly £5,000 and the company pays no National Insurance at all, which is why this number gets recommended so often.
The problem is the lower earnings limit. To earn a qualifying year toward your state pension, your salary has to reach at least £6,708 for 2026-27 (GOV.UK, 2026). A £5,000 salary falls below that line, so the year does not count, even though you pay no National Insurance.
You need 35 qualifying years for the full new state pension and at least 10 to receive anything (LITRG, 2026). The question we get most from new director clients is whether the small National Insurance saving is worth losing a pension year. For almost everyone, it is not.
What Does a £12,570 Salary Cost in Employer NIC?
Your company pays employer National Insurance at 15% on salary above the £5,000 secondary threshold. On a £12,570 salary that works out at (£12,570 - £5,000) x 15%, or £1,135.50 for the year (GOV.UK, 2026).
That sounds like a reason to keep the salary low, but the figure rarely survives a closer look. The salary and the employer National Insurance are both deductible against corporation tax, and salary is still cheaper to extract than dividends, which suffer corporation tax first and dividend tax second.
According to Contractor UK, the net benefit of taking £12,570 rather than a £6,708 salary is about £400 a year for a sole director who cannot claim the Employment Allowance, rising to between £1,284 and £1,851 where the allowance applies (Contractor UK, 2026).
Can You Claim the £10,500 Employment Allowance?
The Employment Allowance wipes out up to £10,500 of employer National Insurance, which more than covers the £1,135.50 a £12,570 salary creates. The catch is that a company whose only employee is a single director cannot claim it (GOV.UK, 2026).
To qualify, you need a second employee earning above the £5,000 secondary threshold. A spouse on the payroll, or a second director drawing a salary, usually unlocks it. We covered the wider rules, including the removal of the old £100,000 restriction, in our Employment Allowance 2026-27 guide.
When we review a client's payroll setup, the most common avoidable cost we see is a single-director company paying employer National Insurance it could have absorbed by putting a working spouse on the books at a sensible salary. It is worth checking before you lock in April's figures.
Your Dividend Headroom After Salary
Once your salary is set, dividends do the rest of the work. After a £12,570 salary, you can draw £37,700 in dividends before your total income reaches the £50,270 higher rate threshold, all taxed at the basic dividend rate (GOV.UK, 2026).
The first £500 of dividends is covered by the dividend allowance and taxed at 0%. Above that, the basic rate is 10.75% for 2026-27, up two percentage points from last year. The higher rate is 35.75% and the additional rate stays at 39.35%. We broke down the increase in our 2026-27 dividend tax guide.
Dividends must come from retained profit after corporation tax, and you need to paper them properly with board minutes and vouchers. Drawing more than the company has in distributable reserves creates an overdrawn director's loan account, which carries its own tax charge.
Salary or Dividends: Which Is More Efficient in 2026-27?
Dividends remain the more efficient way to extract profit, even after this year's rate rise. A basic rate director pays 10.75% on dividends against 20% income tax plus 8% employee National Insurance on the equivalent salary.
That is why the standard structure still holds: a salary up to £12,570 to use the personal allowance and protect your pension, then dividends on top. The salary captures the corporation tax deduction and the National Insurance thresholds, while dividends keep the personal tax rate low.
The structure only changes when your income climbs. Near the £50,270 and £125,140 thresholds, an extra pound of dividend can cost far more, and the salary-versus-dividend balance is worth modelling rather than guessing. If you are weighing up the company route at all, our sole trader versus limited company guide sets out the wider trade-offs.
Frequently Asked Questions
What is the most tax-efficient director salary for 2026-27?
For most directors, £12,570 a year. It uses your full personal allowance, generates no income tax or employee National Insurance, builds a qualifying year toward your state pension, and the £1,135.50 of employer National Insurance is covered if you can claim the Employment Allowance.
Should I pay myself £5,000 to avoid all National Insurance?
Usually not. A £5,000 salary avoids employer National Insurance but falls below the £6,708 lower earnings limit, so the year does not count toward your state pension. The small saving rarely justifies the lost pension year.
Can a sole director claim the Employment Allowance in 2026-27?
No. A company whose only employee is a single director cannot claim the £10,500 Employment Allowance. You need a second person on the payroll earning above the £5,000 secondary threshold, such as a working spouse or a second director.
How much can I take in dividends before paying higher rate tax?
After a £12,570 salary, you can draw £37,700 in dividends before your total income hits the £50,270 higher rate threshold. The first £500 is tax-free under the dividend allowance, and the rest is taxed at 10.75% in the basic band.
Do I still need to run a payroll if I only pay myself a small salary?
Yes, if your salary reaches the lower earnings limit you should register as an employer and report through PAYE so the year counts toward your state pension and your records are clean. Real Time Information filing applies even when no tax is due.
Not sure whether your salary and dividend split still works for 2026-27? Talk to our team - we will review your remuneration, check your Employment Allowance position, and set the numbers before your next payroll run.