For most sole-director companies the answer is £12,570 — but the reasoning behind it changed completely in April 2025, and a lot of advice has not caught up.
Two things drive the calculation. Employer National Insurance is 15%, and the secondary threshold at which it starts is £5,000 a year. That threshold used to sit above the level at which a salary earns a State Pension year, so the old “just take the NIC-free salary” answer worked automatically. It does not any more.
The 2026/27 numbers everything below is built on:
| Figure | 2026/27 |
|---|---|
| Personal Allowance | £12,570 |
| Employee (primary) threshold | £12,570 |
| Employer (secondary) threshold | £5,000 |
| Lower earnings limit | £6,708 |
| Employer Class 1 NIC rate | 15% |
| Employee Class 1 NIC rate | 8% to £50,270, then 2% |
| Employment Allowance | £10,500 |
The single most important point: Employment Allowance
A company whose only employee liable for secondary Class 1 National Insurance is its sole director cannot claim the Employment Allowance. GOV.UK states it plainly: if your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance.
This is not a technicality. It splits the answer in two, and any “optimal salary” figure is worthless unless it says which side of the line it assumes. Most do not.
Case 1: sole director, no other employees
No Employment Allowance. Every pound of salary above £5,000 costs the company 15p in employer National Insurance. Three sensible levels, all at the 19% small profits Corporation Tax rate:
| £5,000 | £6,708 | £12,570 | |
|---|---|---|---|
| Gross salary | £5,000 | £6,708 | £12,570 |
| Income tax | £0 | £0 | £0 |
| Employee NIC | £0 | £0 | £0 |
| Employer NIC at 15% | £0 | £256.20 | £1,135.50 |
| Total company cost | £5,000 | £6,964.20 | £13,705.50 |
| Corporation Tax relief at 19% | £950.00 | £1,323.20 | £2,604.05 |
| Net cost to the company | £4,050.00 | £5,641.00 | £11,101.45 |
| Cash in the director’s hand | £5,000 | £6,708 | £12,570 |
| Qualifying year for State Pension? | No | Yes | Yes |
Why £5,000 is a trap
A £5,000 salary costs nothing in National Insurance. It also does not earn a qualifying year towards the State Pension, because £5,000 is below the £6,708 lower earnings limit.
Earnings at or above the lower earnings limit are treated as if National Insurance had been paid, which secures the qualifying year, even though no contributions are due until the £12,570 primary threshold. Below it there is nothing to credit.
This only became a problem when the secondary threshold dropped to £5,000. It used to sit above the lower earnings limit, so the NIC-free salary and the pension-qualifying salary were the same number. Any article recommending £5,000 without mentioning the gap is recommending a lost pension year.
Why £12,570 usually still wins
The step from £5,000 to £12,570 costs the company £8,705.50 — £7,570 of extra salary plus £1,135.50 of employer NIC. Corporation Tax relief at 19% gives back £1,654.05, so the net cost is £7,051.45.
Leave that money in the company instead and the same £8,705.50 of profit, less £1,654.05 of Corporation Tax, leaves £7,051.45 to distribute as a dividend. Via salary the director gets the full £7,570, with no income tax and no employee National Insurance. So the salary route puts £518.55 more gross income in the director’s hands.
That £518.55 is the whole of the advantage, and this is where most published comparisons go wrong. On a £5,000 salary the director still has £7,570 of Personal Allowance unused, and dividends falling inside an unused Personal Allowance are taxed at 0%. The dividend alternative is not taxed in full at 10.75% or 35.75% — it shelters £7,570 of dividends that a £12,570 salary would have displaced into taxable territory. Set that off and the salary’s real gain is the £518.55 of extra gross income, less the dividend tax the same money would have carried:
- Basic rate (10.75%): salary is £462.80 better
- Higher rate (35.75%): salary is £333.17 better
That is why £12,570 remains the standard answer for a sole director — but the margin is a few hundred pounds, not the four-figure gap you get by pretending the dividend route has no Personal Allowance to use. The stronger reasons are the ones that do not show up in the cash comparison: the qualifying State Pension year, and a Personal Allowance that is fully used through payroll rather than dependent on declaring enough dividends to soak it up.
Case 2: two or more employees liable for secondary NIC
Now the Employment Allowance is in play. Two directors each on £12,570:
| Item | Amount |
|---|---|
| Gross salaries (2 × £12,570) | £25,140 |
| Employer NIC before allowance (2 × £1,135.50) | £2,271.00 |
| Employment Allowance applied | −£2,271.00 |
| Employer NIC payable | £0 |
| Income tax and employee NIC | £0 |
| Total company cost | £25,140 |
| Corporation Tax relief at 19% | £4,776.60 |
| Net cost to the company | £20,363.40 |
Both directors take £12,570 with nothing deducted, and the company pays no employer National Insurance.
The allowance goes a long way. Employer NIC on a £12,570 salary is £1,135.50, so £10,500 covers nine such salaries (£10,219.50), with £280.50 to spare. A tenth would take the bill to £11,355 and leave £855 payable.
The practical implication: a genuine second employee on a real salary — often a spouse doing genuine work for genuine pay — unlocks £10,500 of allowance. That is legitimate, not a scheme, but the work and the pay have to be real and commercially justified.
Should you go above £12,570?
Above £12,570 you hit income tax at 20%, employee NIC at 8% and employer NIC at 15% simultaneously. Does that beat leaving the money in the company and taking a dividend?
Take £1,000 of extra gross salary. The company pays £1,000 plus £150 of employer NIC — £1,150. Compare that with keeping the same £1,150 as profit and distributing it.
| Corporation Tax rate | Profit left after CT | Dividend at 10.75% — director nets | Dividend at 35.75% — director nets |
|---|---|---|---|
| 19% (profits ≤ £50,000) | £931.50 | £831.36 | £598.49 |
| 26.5% (marginal, £50,000–£250,000) | £845.25 | £754.39 | £543.07 |
| 25% (profits > £250,000) | £862.50 | £769.78 | £554.16 |
The salary side does not depend on the Corporation Tax rate:
- Salary between £12,570 and £50,270: £1,000 less 20% tax and 8% employee NIC = £720
- Salary above £50,270: £1,000 less 40% tax and 2% employee NIC = £580
Read across. For a director still inside the basic band, the dividend wins at every Corporation Tax rate — £831.36, £754.39 or £769.78 against £720.
For a director already above £50,270 the answer flips. At the 19% small profits rate the dividend still just wins, £598.49 against £580. At the 26.5% marginal rate and the 25% main rate, salary wins — £580 against £543.07 and £554.16.
That is a direct consequence of the April 2026 dividend rise. Under the old 33.75% higher rate the same comparison at 19% Corporation Tax gave the dividend a £37.12 advantage. It is now £18.49. The gap has halved, and at the higher Corporation Tax rates it has closed entirely.
What this analysis deliberately leaves out
Three things that can change the answer:
- Employer pension contributions. No National Insurance, normally deductible for Corporation Tax, and often more efficient than either salary or dividends for money you do not need immediately.
- The £500 dividend allowance. Every dividend figure above assumes it has already been used elsewhere.
- Student loan repayments, child benefit and tapering, all of which respond to salary and dividends differently.
Scottish taxpayers: the £12,570 conclusion holds, because no income tax is due at that level anywhere in the UK, and National Insurance is UK-wide. Above the Personal Allowance the Scottish bands apply to salary but not to dividends, so the comparison above needs rebuilding.
Frequently asked questions
What is the most tax-efficient director salary for 2026/27?
For most sole-director companies, £12,570. It uses the full Personal Allowance, incurs no income tax and no employee National Insurance, and secures a qualifying year for the State Pension. The company pays £1,135.50 of employer National Insurance at 15% on the amount above the £5,000 secondary threshold.
Can a single-director company claim the Employment Allowance?
No, not where the director is the only employee liable for secondary Class 1 National Insurance. GOV.UK states that if your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance. Adding a second employee on a genuine salary makes the £10,500 allowance available.
Is a £5,000 director salary a good idea in 2026/27?
It avoids all National Insurance, but £5,000 is below the £6,708 lower earnings limit, so it does not earn a qualifying year towards the State Pension. That was not an issue when the secondary threshold sat above the lower earnings limit. It is now.
Should I take more salary than £12,570?
Usually not. Above £12,570 salary attracts 20% income tax, 8% employee National Insurance and 15% employer National Insurance at once. For a director inside the basic band a dividend beats extra salary at every Corporation Tax rate. Above £50,270 it is close, and at the 25% and 26.5% Corporation Tax rates salary is now slightly better.
How many employees does the Employment Allowance cover?
Employer National Insurance on a £12,570 salary is £1,135.50, so the £10,500 allowance covers nine such salaries with £280.50 to spare. A tenth would leave £855 payable.
Getting the number into payroll correctly
The right salary is only half of it. It has to be reported through RTI every month at the right level, with the Employment Allowance claimed or correctly not claimed — an incorrect claim by a sole-director company is one of the more common corrections HMRC issues.
SmartFiling runs RTI payroll from £15 per employee per month, including auto-enrolment, payslips, P60s and year-end returns. Fixed fee, entirely online, reviewed by an ICAEW Chartered Accountant.
