Understanding how to pay yourself as a company director when running a limited company is one of the key factors in remaining tax efficient. For the 2025/26 tax year, Ormerod Rutter Chartered Accountants would recommend that the optimum director’s salary is £12,720 per annum. This would be £1,060 per month, or £244.62 per week.
This salary is what we would consider to be the most tax efficient for most directors.
Why is £12,720 the optimal Director’s Salary?
The figure of £12,720 per annum is only slightly higher than the Personal Allowance, the amount you can earn before paying income tax. This figure is also slightly higher than the primary National Insurance threshold which means that you will be making Employee NI Contributions.
Employee NICs:
Paying NICs or having NIC credits as a director helps to maintain eligibility for:
- State Pension (via credits or actual payments)
- Other State Benefits such as Jobseeker’s Allowance, Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP)
- Child Benefit-linked credits
- Tax-Free Childcare (if income thresholds are met through salary)
Paying employee NICs also ensures that directors have a continuous NIC record which can be crucial for future benefit claims, retirement planning, and avoiding any gaps which could reduce entitlements.
What about Dividends?
If you own your business, you can pay yourself through a salary, by dividends, or a mixture of both.
Whilst a salary is a deductible business expense, dividends are paid from post-tax profit. The benefit of taking a director’s salary rather than dividends alone is that a salary is corporation tax deductible where dividends are not. There are also the NIC related benefits listed above which you wouldn’t contribute towards using dividends alone.
Dividends are a good option for those directors wanting to take additional income on top of the recommended £12,720 per annum salary.
An individual has a dividend allowance of £500 per annum. Any dividends earned above this amount are taxed based on your overall taxable income at 8.75% for a basic rate, 33.75% for an upper rate, and 39.35% for additional rate earners.
Would it ever be beneficial to take dividends alone?
Whilst the optimum director’s salary is the best option for most limited company directors, there are some cases where a £nil salary may be more tax efficient. This could be the case if you:
- Have other taxable income (e.g., pensions, other jobs, rental income)
- Are already of state pension age, making qualifying years irrelevant
In these cases, dividends alone might be a better route to take.
Employment Allowance: Can You Claim It?
The Employment Allowance is a UK government initiative that allows eligible businesses to reduce their annual Employer NI liability by up to £10,500 in 2025/26.
To qualify, a business needs more than one employee or director on payroll. The allowance is offset against employer’s Class 1 NI contributions each time they run payroll until either the £10,500 limit is reached, or the tax year ends.
If your business is eligible, this means that the £1,159.20 employer NI due on a £12,720 salary would be covered by the allowance, making it even more tax-efficient.
By setting a salary that utilises the full £10,500 allowance, employers can reduce their NI contributions, potentially lowering overall tax liabilities.
Even if you don’t qualify for the Employment Allowance, we still recommend paying yourself a salary of £12,720.
You’ll still pay employer NI of £1,159.20, but the corporation tax savings would make it worthwhile. Plus, you secure another qualifying year for your state pension.
Conclusion: What Should You Do in 2025/26?
For most limited company directors, we would recommend:
- Pay yourself a salary of £12,720
- Take additional income as dividends
- Consider your eligibility for Employment Allowance
This strategy allows you to maximise what you earn from your business in a tax efficient way whilst also taking steps to secure the state benefits you’re entitled to.
We understand that every director’s situation is different and if you would like further advice to discuss your options then please contact our payroll team on 01905 777600 or email payroll@orsolutions.co.uk to assist you.
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