Everything you need to know about your directors salary for 2025/2026.
The basics – Understanding the differences between a shareholder and a Director.
Essentially, the shareholders of a company own a company through their holding of shares and they appoint directors to run the company on their behalf.
In a PSC, the shareholders and directors will often be the same person/people, but it’s important to understand the difference between the two roles.
When it comes to salary and dividends, a salary may be paid to directors for performing their duties as an officer of the company, and a dividend may be paid to shareholders for their share of post-tax distributed profits.
What assumptions do we make when assessing the optimum salary?
- You are a UK resident taxpayer with a standard personal allowance;
- Your only source of income is your salary and dividends from your limited company;
- You are not working inside IR35.
Most tax-efficient dividend and salary structure for 2025/26
For limited company contractors, taking a low salary with the balance of income being extracted as dividends is a common tax planning strategy.
The rationale for this is as follows:
- You withdraw a low tax-efficient salary, no higher than the personal allowance so that it does not attract personal tax;
- Ensure the salary is high enough for National Insurance purposes i.e. that it counts as a year ‘stamp’ for your National Insurance history for pension purposes and other benefits;
- The salary is a tax-allowable cost for your business therefore corporation tax is saved on the gross salary;
- Any additional amounts you withdraw from your company would be treated as dividends which do not attract National Insurance;
- Please note that dividends are not a tax-allowable expense for your company (unlike a salary), so your company does not save corporation tax on the dividends.
What are the options?
Recommended options are as follows:
- Set your director’s salary at £12,570- this is the personal allowance for the year and also the rate at which employees start to pay Employee’s National Insurance;
- Set your director’s salary at £6,500- this is the lower earnings limit, above which you earn National Insurance credits that count towards your state pension.
- Set your director’s salary at £5,000- this is the Employer’s National Insurance limit where employers start to pay Employer’s National Insurance.
- Set your director’s salary at another amount- you should consider the impact of the above thresholds on your salary choice.
Recommended Director’s Fee of £12,570 (£1047.50 a month)
A sole director taking a salary at this level will incur Employer’s National Insurance on their wages, but this is offset against the tax relief they can claim against Corporation Tax.
- Taking a salary at the Employee’s Primary Threshold and personal allowance threshold means that you do not pay the Employee’s National Insurance or income tax on your salary of 12,570.
- However, paying a salary above the Employer’s Secondary Threshold of £5,000 does mean that you’ll need to pay Employer NI contributions. It works out at about £1,135 for the year- however, you will be marginally better off by £379 and £622 respectively as a basic rate/higher rate taxpayer.
- If both directors take £12,570, then they have the additional benefit where the Employment Allowance reduces the Employer’s National Insurance cost to nil (the Employment Allowance covers Employer’s National Insurance up to £10,500).
- Although the company will incur the Employer’s NI, it will also be able to claim tax relief for your salary, which will reduce your Corporation Tax bill. This reduction is more than the Employer’s NI that your company will need to pay on this salary, so will effectively cancel it out.
- As the £12,570 is above the Lower Earnings Limit of £6,500, you will still earn National Insurance credits, which count towards your state pension and can help qualify for some other benefits.
Take a salary of £6,500 (£541.66 a month)
Taking a lower salary as a sole director can mean there’s more money left for dividends at the end of the year, however, paying this amount is less tax efficient than taking a salary of £12,570 ( £1047.50 a month).
- As a sole director, you can’t claim the Employment Allowance,. Unusually the Employer’s National Insurance threshold is set lower than the lower earnings limit for this year, therefore there will be Employer’s National insurance to pay. It works out at about £225 for the year.
- The company can claim tax relief against your salary, which will help to reduce its Corporation Tax bill;
- This salary is lower than the Primary Threshold, so you won’t need to pay Employee’s NI.
- It’s set at the Lower Earnings Limit, so you will still earn National Insurance credits, which contribute to your state pension.
- This is less than the tax-free Personal Allowance threshold, so some of your allowance is available for offset against dividends.
- As noted above, in the round, you will be marginally worse off by £379 and £622 respectively as a basic rate/higher rate taxpayer, if you opt for taking £6,500 rather than £12,570 during the year.
Take a salary of £5,000 (£416.66 a month)
Taking a lower salary as a sole director can mean there’s more money left for dividends at the end of the year, however, paying this amount is less tax efficient than taking a salary of £6,500 (£541.66 a month).
- This salary is lower than the Employer’s and Employee’s NI threshold and personal allowance threshold, so there is no National Insurance or income tax to pay.
- It is less than the lower earnings limit of £6,500, therefore you will not earn pension credits towards your state pension.
- This is the less tax efficient option of the recommended salaries above, as you will be marginally worse off by £93 and £154 respectively as a basic/higher rate taxpayer, if you opt for taking £5,000 rather than £6,500 during the year.
Taking another amount as salary
You are free to choose any salary you wish-however, a higher salary might affect your company’s cash flow throughout the year (and will leave a bit less in the pot for dividends).
What if I have another source of income?
- The optimum amount for the director’s payroll takes advantage of the Personal Allowance (£12,570). If you are already using it up because you have other income from elsewhere, then director’s payroll becomes PAYE payroll, and subject to tax and National Insurance as normal- therefore it may be inefficient to process a Director’s salary in these circumstances.
What happens if I start a company but don’t take a director’s salary straight away?
- If you register a limited company but wait a few months before taking a wage, you can backdate your optimum salary to the incorporation date and still remain tax efficient as long as you’re still in the same financial year.
- If a director joins the business later on, the National Insurance threshold is pro-rated from the date that the director is appointed, regardless of when the salaries actually start being paid.
Conclusion
The most efficient salary for a sole director in 2025/26 is £12,570.
The most efficient salary for 2 or more directors in 2025/26 is £12,570 each.
This is because two or more directors can take an annual salary up to the Primary Threshold without needing to pay the Employee’s National Insurance and then claim the £10,500 Employment Allowance to cover the portion of the employer’s National Insurance they would otherwise incur.
It is important to note it is up to you as the director/shareholder to decide how much salary and/or dividends you want to pay.