Director's Salary 2026/27: The Optimal Number for Tax Efficiency

The 2026/27 question is no longer the same as 2024/25

Three changes have pulled the director's salary calculation apart since the 2024 Budget. Employer National Insurance Contributions (NIC) jumped from 13.8 percent to 15 percent in April 2025. The Secondary Threshold (the wage level at which employer NIC starts) fell from £9,100 to £5,000 at the same time. And from 6 April 2026 the dividend ordinary rate rises from 8.75 percent to 10.75 percent.

If your accountant gave you the same number this year as last year without redoing the maths, you are probably losing several hundred pounds.

The rest of this article walks through the two real scenarios, the figures that drive each one, and the number to actually run on payroll from 6 April 2026.

Scenario one: single-director company with no other employees

This is the most common LOYALS client by some distance. You incorporated to extract profit tax-efficiently, you do not employ anyone else through PAYE, and the company exists primarily to bill clients for your work.

You cannot claim the Employment Allowance. The rule that excludes single-director companies with no other employees has been in force since 2016 and still applies for 2026/27, even after the wider eligibility expansion from April 2025. Confirm this with your accountant if your circumstances changed mid-year, because adding a second employee on payroll above £5,000 unlocks the allowance and changes the answer.

With no Employment Allowance available, every pound of salary above £5,000 attracts employer NIC at 15 percent. The optimal answer is therefore: pay yourself £5,000 for the year, exactly at the Secondary Threshold, and take everything else as dividends.

At £5,000 salary, the company pays no employer NIC and the director pays no Income Tax and no employee NIC. The salary is deductible against corporation tax at 19 percent (small profits rate), so the net cost to the company is around £4,050 to put £5,000 in the director's pocket.

Scenario two: you can claim the Employment Allowance

If your company has at least one other employee on payroll earning above the £5,000 Secondary Threshold, you qualify for the Employment Allowance. For 2026/27 the allowance sits at £10,500 per year, and the previous £100,000 employer NIC cap on eligibility was removed in April 2025.

The allowance wipes out the first £10,500 of employer NIC liability. That is enough to absorb the employer NIC on a single director's salary at the full Personal Allowance of £12,570 with plenty of room left over for other staff.

The optimal salary in this scenario is £12,570, matching the Personal Allowance exactly. The director pays no Income Tax on the salary because it sits within the tax-free band. Employee NIC is roughly nil at this level (the Primary Threshold is also £12,570). Employer NIC of £1,135.50 is generated on paper but absorbed by the Employment Allowance, so the actual cash cost is zero.

The £12,570 salary is also fully deductible against corporation tax, saving 19 percent at the small profits rate. Net cost to the company to put £12,570 in the director's pocket is roughly £10,182.

What about taking everything as salary?

Some directors ask why not just run everything through PAYE. The maths kills it quickly. Once salary crosses the Personal Allowance of £12,570, every extra pound attracts Income Tax at 20 percent or higher, plus employee NIC at 8 percent up to the Upper Earnings Limit, plus employer NIC at 15 percent (less Employment Allowance if eligible).

Compare that to extracting profit as dividends. The company pays corporation tax at 19 percent on the underlying profit, the director then pays dividend tax at 10.75 percent (basic rate, from April 2026) or 35.75 percent (higher rate, from April 2026) on the cash dividend. The combined effective rate is well below the equivalent salary rate.

The dividend route still wins comfortably in 2026/27, even after the rate rise. A higher-rate director extracting £40,000 of dividends pays around £790 more per year than they did in 2025/26, which is meaningful but does not flip the structural answer.

The state pension credit point most directors miss

A £5,000 salary does not earn a credit toward your state pension record. The Lower Earnings Limit (LEL), which is the income level required to earn a qualifying year, sits at around £6,500 per year for 2026/27. The Secondary Threshold of £5,000 is below that.

If you are a director relying on a £5,000 company salary as your only earnings, you will not be building state pension entitlement from this work. A handful of options exist if that matters to you.

The first option is to run salary up to £6,500 or so. You will pay a small amount of employer NIC, roughly 15 percent of the £1,500 excess (£225), and gain the pension qualifying year. For most clients the £225 cost is worth it. The second option is to keep salary at £5,000 and pay voluntary Class 3 NIC (£907.40 for 2026/27 at the time of writing). Cheaper if you only need one or two years of credit, but more expensive if you need decades.

The April 2026 dividend rate rise, quantified

For directors taking sizeable dividends, the rate change has real cash impact. The April 2026 increase moves the ordinary rate from 8.75 percent to 10.75 percent and the upper rate from 33.75 percent to 35.75 percent. The additional rate is unchanged at 39.35 percent.

A basic-rate director taking £40,000 of dividends in 2026/27, after the £500 dividend allowance, will pay roughly £790 more dividend tax than in 2025/26. A higher-rate director taking £60,000 of dividends, where the first chunk is taxed at the new 10.75 percent rate and the rest at the new 35.75 percent rate, will pay around £1,200 more.

The cleanest mitigation is timing. If your company has accumulated retained profits that you were planning to extract in 2026/27, declaring the dividend before 6 April 2026 captures the old rate. Speak to your accountant before the year-end if cash flow allows. Pension contributions through the company are another route, particularly for higher-rate directors, because employer pension contributions stay outside the dividend regime entirely.

What about marginal rate corporation tax?

If your company profit sits between £50,000 and £250,000, you fall into the corporation tax marginal relief band. The effective rate runs at 26.5 percent on profit in that range, compared with 19 percent on the first £50,000. Marginal relief is not as bad as the headline 25 percent main rate, but it does change the calculation slightly.

At marginal rate the salary deduction is worth more (you save 26.5 percent rather than 19 percent), so a higher salary becomes mildly more attractive. The shift is small. For a single-director company, £5,000 still wins. For a company with the Employment Allowance, £12,570 still wins.

Where marginal relief really matters is the pension contribution decision. A company at marginal rate gets a 26.5 percent corporation tax deduction on employer pension contributions, which compounds with the absence of dividend tax to make pension extraction quietly powerful.

What this means for you

If you are a single-director Ltd Co with no other employees, set your 2026/27 salary at £5,000 and run dividends for the rest. If you have one or more other employees paid above £5,000, claim the Employment Allowance and run salary at £12,570.

If pension contributions are part of your plan, run them through the company rather than personally. Employer pension contributions sidestep dividend tax entirely and remain deductible against corporation tax, so you get the full benefit at the company's marginal or small profits rate.

If you have accumulated retained earnings and were going to take a large dividend in 2026/27, consider whether to bring some of it forward into 2025/26 to capture the old 8.75 percent or 33.75 percent rates. The window closes on 5 April 2026.

Finally, if you operate through more than one company or you have personal income from other sources (rental, employment, partnership), the answer can change. The calculations above assume the company is your only income source. A proper review by chartered accountants takes 30 minutes and usually saves four-figure sums for the year ahead.