For owner‑managed limited companies, deciding how much salary a director should take is a key part of tax planning. The optimal salary depends largely on whether the company can claim the Employment Allowance and how National Insurance Contributions (NIC) apply.
With employer NIC now at 15%, Employment Allowance removed for single-director companies with no other employees and the secondary threshold reduced to £5,000, careful planning is essential.
Key Figures for 2026/27
Personal Allowance: £12,570.
Employer NIC rate: 15%.
Secondary (employer) NIC threshold: £5,000 per year (the amount available to earn before Employer NIC is charged).
Employment Allowance: up to £10,500 per year (if available).
Lower Earnings Limited: £6,500 per year (the minimum earnings to secure a qualifying year for state pension)
Why Take a Salary?
A salary is deductible for corporation tax, provides entitlement to the state pension and benefits, and offers a predictable income stream. The aim is to take enough salary to use allowances and NIC credits without triggering unnecessary tax or NIC.
Option 1: Employment Allowance Not Available (Typical Single‑Director Company)
Most single‑director companies cannot claim the Employment Allowance if the director is the only person paid above the NIC secondary threshold.
Recommended salary: £12,570. This uses the full personal allowance, avoids income tax, preserves state pension entitlement, but creates an employer NIC liability on earnings above £5,000.
At this salary level, employer NIC is payable on £7,570, resulting in employer NIC of approximately £1,136 for the year. Despite this cost, the position remains tax‑efficient overall due to the corporation tax savings.
Option 2: Employment Allowance Available
Where the company employs at least one other employee earning above the NIC secondary threshold, the Employment Allowance of up to £10,500 may be available.
In this case, a salary of £12,570 is particularly attractive as employer NIC is offset by the allowance, often reducing the employer NIC cost to nil while still using the full personal allowance.
In some circumstances, a slightly higher salary may be considered, but once employee NIC becomes payable or the allowance is fully used, further salary increases are usually less efficient than dividends.
Comparison Summary
Without Employment Allowance: Salary £12,570, employer NIC approximately £1,136, no personal tax. With Employment Allowance: Salary £12,570, employer NIC nil, no personal tax.
What About Lower Salaries?
Paying a salary just above the NIC lower earnings limit can preserve state pension entitlement without employer NIC, but leaves part of the personal allowance unused and pushes more income into dividends, which are taxed at higher rates from April 2026.
Summary
For 2026/27, £12,570 remains the optimal director salary in most cases. Employment Allowance availability determines whether employer NIC is a real cost. As always, the optimal approach depends on profit levels, employment structure and wider tax planning.
