What’s the Most Tax-Efficient Salary for Directors from 2026/27?
Here are the key figures:
At £5,000 Employer National Insurance kicks in at 15.05%. The first £5,000 is exempt.
If you are the only employee, you will not benefit from the annual Employment Allowance which effectively pays your first £10,500 of Employer National Insurance.
An annual salary of £5,000 will obviously avoid Employer National Insurance, but it will NOT count as a qualifying year for state pension.
The minimum annual salary for a qualifying state pension year is £6,708.
Dividends are taxed at 10.75% above the £500 tax free annual allowance.
This table shows the tax effect of different salaries for single director companies and companies with more than one employee.
For the 2026/27 tax year, the most tax-efficient strategy for all UK limited company directors is generally a salary of £12,570 per annum (matching the personal allowance) combined with dividends. Despite a 2% increase in dividend tax rates (to 10.75% basic) from April 2026, this approach, often utilizing the Employment Allowance to minimize employer NI, remains superior to taking a higher salary.
The Employment Allowance is not available if the only employee is a director.
Recommended Structure 2026/27 (Per Director)
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Salary: £12,570 (£1,047.50 per month).
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Why: No Income Tax is paid, and it uses the full Personal Allowance. It also ensures the year counts towards your state pension.
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Note: Employer National Insurance (NIC) will be due unless the company qualifies for the Employment Allowance.
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Dividends: Up to £37,700 (total income £50,270).
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Why: Keeps you within the basic rate tax band.
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Dividend Allowance: The first £500 of dividends is tax-free.
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Dividend Tax Rate: Basic rate increases to 10.75% (from 8.75% previously).
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Higher Rate Threshold: Income above £50,270 is taxed at higher rates (35.75% for dividends).
Key 2026/27 Tax Considerations
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Dividend Tax Hike: From 6 April 2026, dividend tax rates increase by 2 percentage points. Basic rate becomes 10.75%, higher rate 35.75%.
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Frozen Thresholds: The Personal Allowance remains at £12,570 and basic rate limit at £50,270, creating "fiscal drag".
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Alternative - Pension: For higher-rate taxpayers, employer pension contributions are often more tax-efficient than dividends, as they are fully deductible for corporation tax and incur no NICs.
If you’re a sole director, taking a salary of £12,570 will incur Employer’s NICs on wages. But the salary AND Employer NI is offset against the company profits, which reduces the company’s Corporation Tax liability. The reduction in the Corporation Tax is greater than the employer’s national insurance and, therefore, is more tax efficient overall.
Employer’s NI Payment Schedule for 2026/27
You’ll start paying from PAYE month four (August), with the first payment due on 19 September and each month after:
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Due 19 September £35.74
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Due 19 October £157.65
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Due 19 November £157.65
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Due 19 December £157.65
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Due 19 January £157.65
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Due 19 February £157.65
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Due 19 March £157.65
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Due 19 April £157.65