Structuring Directors pay for Tax Efficiency

If you’re a UK limited company director, knowing how to structure your pay for tax efficiency can save your business money. For the 2025/26 tax year, the smart approach remains a mix of salary and dividends—but what salary level makes the most sense depends on your setup.

Whether you’re a sole director or have additional people on the payroll, we’ll break down your best options for this year.

Quick Summary

If your company expects to make at least £12,570 profit (before paying out any salary or dividends), the most tax-efficient way to pay yourself is generally:

• Salary: £12,570

• Dividends: Any additional income you want to take

This approach works well because the salary uses your full tax-free personal allowance. Even though it triggers some Employer’s National Insurance, the corporation tax savings on the salary expense usually outweigh that cost.

What This Assumes

This guidance assumes:

• You’re a director and shareholder

• You don’t have any other personal income (employment, rental, investment, etc.)

• Your company is generating enough profit to pay salary and dividends

If you have other income, a tailored approach might be needed.

If You’re the Only Person on Payroll

If you’re a sole director with no other employees, you have three salary strategies to consider:

Option A – £5,000 Salary

• No income tax

• No Employer or Employee National Insurance

• Doesn’t count as a qualifying year for your state pension

• Remaining income paid through dividends

This is the cleanest option if your goal is to avoid payroll taxes altogether. But the trade-off is missing a qualifying year for future state pension entitlement.

Option B – £6,500 Salary

• No income tax

• Small Employer National Insurance liability (around £225)

• Counts as a qualifying year for your state pension

• Remaining income paid through dividends

This strikes a balance between keeping costs low and securing your state pension record.

Option C – £12,570 Salary

• No income tax (uses full personal allowance)

• Employer NI liability of around £1,135.50

• Qualifying year for your state pension

• Remaining income paid through dividends

Although this option comes with a higher NI cost, it also reduces your corporation tax bill. For example, if your profits are £50,000 or less, you’ll save around £1,654 in corporation tax due to the salary expense—outweighing the NI cost.

If You Have Other Directors or Employees on Payroll

If your company employs at least one additional person—or has two or more directors on payroll—you’re likely eligible for the Employment Allowance. This allowance covers up to £10,500 of Employer’s NI for the company.

Why Option C Works Best Here

With the Employment Allowance covering your Employer’s NI, Option C becomes even more attractive. Paying each director a £12,570 salary allows you to:

• Use the full personal allowance

• Avoid personal tax and employee NI

• Avoid employer NI (as it’s covered by the allowance)

• Secure a qualifying year for the state pension

• Maximize corporation tax savings

For example, if two directors are each paid £12,570, the Employer NI cost would normally be £2,271. But if you qualify for the allowance, the full amount can be covered—resulting in no NI liability at all.

2025/26 Key Thresholds at a Glance

• Personal Tax Allowance: £12,570

• Employer NI threshold: £5,000

• Lower Earnings Limit (qualifies for pension): £6,500

• Employer NI rate: 15%

• Employment Allowance: £10,500 per company

• 
  

Common Questions

Will I qualify for the state pension with a low salary?

Only if your salary is at least £6,500 (the Lower Earnings Limit). Option A falls below this, so it won’t count as a qualifying year.

What’s the tax rate on dividends?

Dividends are taxed after your personal allowance and £1,000 dividend allowance. Rates are lower than regular income tax but vary by income level.

Can I avoid Employer’s NI entirely?

Yes—if you’re eligible for the Employment Allowance, it can cover up to £10,500 of Employer’s NI costs for your company.

Final Thoughts

Choosing how to pay yourself as a director isn’t just about compliance—it’s about keeping more of what you earn. For 2025/26, a smart mix of salary and dividends remains the best approach.

• Option A: Minimal salary, no NI or tax—great for simplicity, but no pension credit

• Option B: Slightly higher salary with pension credit at low cost

• Option C: Full use of your personal allowance, better long-term tax efficiency, especially if you qualify for the Employment Allowance

At our firm, we help directors like you get this right every year. Whether you want to reduce your tax bill, stay compliant, or plan for the future—we’ve got you covered.

Get in touch with us today and we’ll help you set up the most efficient structure for your business.