Optimal Director's Salary for 2026/27
Should you take £12,570 or £5,000? The numbers, the reasoning, and when each option makes sense.
Key takeaways
- For most single-director limited companies, the optimal salary is £12,570 — the personal allowance threshold.
- At this level: no income tax on salary, no employee NI, and the salary saves approximately £2,604 in corporation tax.
- The trade-off: your company pays approximately £1,136 in employer's NI — but the CT saving more than offsets this.
- If your company has very low profits (under ~£10,000), or you have other income using your personal allowance, £5,000 may be better.
- Always confirm with your accountant — your specific circumstances may change the answer.
If you run a UK limited company and pay yourself through a combination of salary and dividends, one question comes up every tax year: what is the most tax-efficient salary to take?
If you've read that the optimal salary is £5,000 on one site and £12,570 on another, you're not alone. Both numbers appear in legitimate advice because they correspond to different National Insurance thresholds — and the right answer depends on your circumstances.
This guide explains the reasoning behind both figures, shows the exact arithmetic, and helps you understand which applies to your situation. It covers the 2026/27 tax year (6 April 2026 to 5 April 2027). For the complete picture of all remuneration methods (salary, dividends, pensions, and more), see our guide to paying yourself from a limited company.
What changed for 2026/27
The personal allowance and NI thresholds remain frozen. Dividend tax rates increased by 0.75 percentage points from April 2026 (basic rate now 10.75%, higher rate now 35.75%). The employer NI secondary threshold was reduced to £5,000 from April 2025. Bottom line: the optimal salary for most directors is still £12,570. For a full breakdown of all 2026/27 tax changes affecting directors, see our tax year changes guide.
Not financial advice
This guide explains the general principles for illustrative purposes. It is not financial advice. Always discuss your specific circumstances with a qualified accountant.
Key Thresholds
Three salary thresholds every director should know
These three numbers keep appearing in salary advice because each one marks a point where the tax rules change.
Employer NI Secondary Threshold
£5,000
Below this: no employer's NI. Above this: the company pays 15% on every pound of salary.
HMRC source →NI Lower Earnings Limit
£6,396
Above this: the year counts toward your state pension. Below this: no qualifying year for state pension purposes.
HMRC source →Personal Allowance & Employee NI Threshold
£12,570
Below this: no income tax and no employee NI on salary. This is both the personal allowance and the NI primary threshold for 2026/27.
HMRC source →The Core Comparison
£5,000 vs £12,570: a side-by-side comparison
Based on £50,000 gross profit — the most common scenario for single-director companies.
| Line Item | £5,000 Salary | £12,570 Salary | Difference |
|---|---|---|---|
| Salary (gross) | £5,000 | £12,570 | — |
| Employer's NI (15% above £5,000) | £0 | £1,136 | +£1,136 |
| Corporation Tax saved (salary deductible) | £950 | £2,388 | +£1,438 |
| Corporation Tax saved (employer NI deductible) | £0 | £216 | +£216 |
| Employee NI | £0 | £0 | £0 |
| Income Tax on salary | £0 | £0 | £0 |
| Net benefit of £12,570 over £5,000 | ~£519 |
Employer's NI Cost
Corporation Tax Saved
Employee NI & Income Tax on Salary
The arithmetic: A salary of £12,570 costs the company £1,136 in employer's NI. But it also saves £2,604 in corporation tax (because both the salary and the employer's NI are deductible expenses). The net benefit is approximately £519 in reduced overall tax — which increases your take-home pay compared to a £5,000 salary.
These figures assume the small profits Corporation Tax rate of 19%. If your profits are between £50,000 and £250,000 (marginal relief range), the CT saving is higher. If above £250,000 (main rate of 25%), higher still.
See how this applies to your company
The figures above assume £50,000 profit. Use our calculator to model your specific numbers — it runs the same calculations with your figures.
Edge Cases
When might £5,000 be the better choice?
Very low company profits
If your company earns under ~£10,000, taking £12,570 as salary may leave almost nothing for dividends and force the company to run at a loss after employer's NI. In this scenario, a lower salary preserves more of the profit for dividends.
You have other income using the personal allowance
If you have pension income, rental income, or another salary that already uses your £12,570 personal allowance, any salary from your company would be taxed at 20% from the first pound. In this case, a lower salary or even zero salary may be more efficient.
Your company claims the Employment Allowance
If your company has other employees and claims the Employment Allowance (£10,500 for 2026/27), employer's NI is offset. In this case, £12,570 is even more clearly optimal because the NI cost is reduced or eliminated. Most single-director companies without other employees are not eligible for the Employment Allowance.
You don't need state pension credits
If you've already accrued 35 qualifying years, or you have other pension provision, the state pension argument for a higher salary is less relevant. But £12,570 is still usually better on the tax arithmetic alone.
Don't forget the state pension
A salary below the NI Lower Earnings Limit (£6,396 for 2026/27) does not count as a qualifying year for the state pension. You need 35 qualifying years for the full new state pension.
If you take £5,000, you can still get a qualifying year by voluntarily paying Class 3 NI contributions (£17.75 per week for 2026/27, approximately £923 per year). But for most directors, paying £12,570 salary is simpler and more tax-efficient overall — it qualifies for the state pension and saves more in corporation tax than it costs in employer's NI.
Source: HMRC NI rates and allowances
Worked Example
How the numbers work: a step-by-step walkthrough
£50,000 company profit, single director, no other income — at the £12,570 salary level.
- 1
Start with company profit
Gross profit: £50,000
- 2
Deduct salary
£50,000 − £12,570 = £37,430
- 3
Calculate employer's NI
15% × (£12,570 − £5,000) = £1,136
- 4
Deduct employer's NI
£37,430 − £1,136 = £36,295
- 5
Calculate Corporation Tax
19% × £36,295 = £6,896
- 6
Remaining for dividends
£36,295 − £6,896 = £29,399
- 7
Personal tax on salary
£0 (within personal allowance)
- 8
Personal tax on dividends
First £500 tax-free. Remaining £28,899 at 10.75% = £3,107
- 9
Total take-home
£12,570 (salary) + £29,399 (dividends) − £3,107 (dividend tax) = £38,862
The same calculation at £5,000 salary
Employer's NI: £0 · Corporation Tax: £8,550 · Dividends: £36,450 · Dividend tax: £3,051
Total take-home: £38,399
The £12,570 salary gives you approximately £463 more take-home pay.
These are the exact calculations our salary vs dividend calculator performs — try it with your own figures.
Model your own numbers
Enter your company's revenue and expenses, and see the optimal salary and dividend split calculated for your specific situation.
Other Factors
Beyond the numbers: other factors to consider
Mortgage applications
Lenders often look at salary, not dividends, when assessing affordability. A higher salary may help with mortgage applications, although many specialist lenders for contractors and directors now consider salary plus dividends. Discuss your plans with a mortgage broker who understands limited company structures.
Maternity and paternity pay
Statutory maternity and paternity pay is based on average weekly earnings. A salary of £5,000 would result in lower statutory entitlement than £12,570. If you or your partner may need to claim statutory pay, factor this into your salary decision.
Pension contributions
Your company can make employer pension contributions as a deductible expense regardless of your salary level. However, personal pension contribution tax relief is linked to earned income (salary). If you want to make personal pension contributions and claim tax relief, your salary level sets the maximum amount.
Dividend paperwork
Every dividend payment requires a board minute and dividend voucher. Salary requires PAYE registration and RTI submissions. Both approaches have administrative requirements — neither is paperwork-free. Most accounting software handles the routine filings automatically.
FAQ
Frequently asked questions
Sources
| Source | Verified |
|---|---|
| Income Tax rates and bands | 2026-03-16 |
| NI rates and thresholds for employers 2026/27 | 2026-03-16 |
| Corporation Tax rates | 2026-03-16 |
| Tax on dividends | 2026-03-16 |
| Autumn Budget 2024 OOTLAR | 2026-03-16 |
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This guide provides general information for illustrative purposes. It is not financial advice. Discuss your circumstances with a qualified accountant.