Directors salary

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What is the Optimum Director’s Salary for 2025/26?

For the 2025/26 tax year, the optimum director’s salary — in most cases where there are no other sources of income — is £12,570 per annum, which equates to £1,047.50 per month.

Why £12,570?

The optimum director’s salary for 2025/26 is £12,570 per annum due to the alignment of National Insurance (NI) thresholds with the personal allowance. This figure maximises tax efficiency while preserving entitlement to state benefits.

The Lower Earnings Limit for NI in 2025/26 is £6,500 per annum. Earning above this qualifies the individual for a year towards their state pension.
The Primary Earnings Limit is £12,570. Earning above this means the employee will begin paying NI contributions.
The Secondary Threshold is £5,000. If annual earnings exceed this, the employer (the company) becomes liable for NI contributions.

By paying a salary of exactly £12,570, the director qualifies for a state pension year without paying employee NI contributions. While it may seem counterintuitive, you can qualify for a state pension year without making personal NI payments.

Why Not Pay a Nil Salary?

A company can pay a director (who is also a shareholder) through either salary or dividends:

Salaries are tax-deductible expenses, reducing the company’s corporation tax liability.
Dividends are not tax-deductible.

Paying a salary of £12,570 can save corporation tax of between £2,388 and £3,331, depending on the company’s tax rate (19%, 25%, or 26.5%).

In addition, paying this salary ensures another qualifying year for the state pension is added.

When is a Nil Salary Advisable?

The optimum director’s salary of £12,570 should only be used if the director has sufficient personal tax allowances available.

In situations where the director has other sources of income — such as pension income, employment elsewhere, or rental income — it may be advisable to pay a nil salary. This also applies if the director is already over state pension age and no longer needs qualifying years. In these cases, it’s crucial to seek specialist tax advice, which we can provide.

Why Not Pay a Higher Salary?

All taxpayers receive a personal allowance which allows them to earn income tax-free. Once income exceeds £12,570, both income tax and National Insurance apply.

The combined rates of NI and income tax exceed the tax rate on dividends. Even accounting for the corporation tax savings on salary, dividends are still more tax-efficient beyond this threshold.

Why Not Pay a Director’s Salary of £5,000?

In previous years, it was common to recommend paying a salary up to the secondary threshold to avoid employer and employee NI contributions. For 2025/26, this threshold is just £5,000 (down from £9,100 in 2024/25).

Paying only £5,000 avoids:

PAYE
Employee NI
Employer NI

However, we recommend the higher salary of £12,570 as it offers greater corporation tax savings:

Employer NI of £1,136 applies (calculated as £7,570 × 15.0%)
Corporation tax savings of at least £1,654 (19% of £7,570 + 19% of £1,136)
At the higher tax rate of 26.5%, the savings increase to £2,307

Can I Claim the Employment Allowance?

The Employment Allowance lets eligible businesses reduce their employer NI liability by up to £10,500 per annum — a significant rise from the £5,000 limit in 2024/25.

However, not all companies qualify. To be eligible the company must have more than one employee or director on the payroll.

If eligible, the £1,136 employer NI becomes nil, further increasing the tax efficiency of paying the £12,570 salary.

What is the Optimum Director’s Salary for a Sole Director in 2025/26?

Sole directors without other employees are not eligible for the Employment Allowance. This means that employer NI of £1,136 will be payable.

While it may seem logical to pay just £5,000 (to avoid employer NI), we do not recommend this. The higher salary of £12,570 results in greater corporation tax savings — at least £1,654, rising to £2,307 depending on the applicable rate.

Therefore, sole directors should still pay themselves £1,047.50 per month to maximise tax savings and secure a qualifying year for the state pension.

Should Sole Director Companies Employ Additional Staff?

The Halloween Budget 2024 introduced changes that increased the employer NI liability for sole director companies from £479 to £1,136 — an increase of £657.

One way to potentially offset this increase is by employing another person, which may make the company eligible for the Employment Allowance.

Many sole director businesses rely on partners (spouses, partners, etc.) for unpaid administrative work — such as invoicing, chasing payments, paying suppliers, or bookkeeping. Bringing them on as a paid employee could make business sense and unlock additional tax benefits.

What Was the Optimum Director’s Salary in 2024/25?

Typically, the optimum director’s salary changes each year as tax and NI thresholds are updated.

However, for 2024/25, the thresholds remained the same, so the optimum salary was also £12,570.

How to Optimise Salary and Dividends for Directors in 2025/26

Once income exceeds £12,570, dividends become more tax-efficient than additional salary, because dividend tax rates are lower than PAYE and NI rates.

Since £12,570 isn’t sufficient for most people to live on, dividends are often used to top up income assuming the director is also a shareholder.

Here’s how the 2025/26 dividend tax bands work:

First £500 of dividends: tax-free (dividend allowance)
Next £37,200: taxed at 8.75% (basic rate band ends at £50,270 total income)
Higher rate: 33.75%
Additional rate: 39.35%

Conclusion – Optimum Director’s Salary for 2025/26

Most owner-managed businesses should pay directors a salary of £12,570. While employer NI has increased for 2025/26, this salary level still offers the best overall tax outcome.