As a director of your own limited company, it’s important to remember that you are legally separate from the company—even if you’re the owner. This means you can’t simply keep the company’s profits for yourself in the same way a sole trader might. Instead, you need to decide how to take a salary, and choosing the most tax-efficient method is key to maximising your income while minimising tax liabilities.

Taking a Salary and Dividends: The Optimal Strategy 

If you’re a director, you’re technically an employee of your own limited company. This dual role—both employer and employee—affects how you handle your income. In particular, National Insurance Contributions (NICs) apply to salaries, but not to dividends. To reduce your tax burden, the most tax-efficient approach is usually to pay yourself a lower salary (similar to other employees) and complement it with dividend payments.

But how much salary should you take from your limited company? The answer isn’t straightforward. 

To optimise your tax position, you need to balance several factors, including:

• National Insurance Contributions (NICs) as both an employer and an employee
• The number of people in your business
• Dividend tax allowances
• Personal income tax allowances
• Tax relief on employee salaries

We’ll walk you through how to determine the best director’s salary for your circumstances, so read on for expert advice.

What does National Insurance mean for Director’s Salaries

When you pay yourself a salary, both you (the employee) and your company (the employer) must pay NICs, but at different thresholds. Understanding these thresholds is essential to determine the most tax-efficient salary.

For instance, if your salary exceeds the National Insurance Primary Threshold (where employees start paying NICs) and the Secondary Threshold (where employers begin to contribute), both you and your company will be paying NICs on the same income, which is not tax-efficient. 

Here’s a breakdown of the NICs thresholds for the 2024/25 and 2025/26 tax years:

How to Optimise your Director’s Salary to Qualify for State Pension

To qualify for the full State Pension, directors need to earn above the
Lower Earning Limit (£6,396 in 2024/25). Earnings between this limit and the

Primary Threshold (£12,570) will not incur NICs, but you will still accumulate credits for your State Pension.

If you take a salary that’s below the Primary Threshold but above the Lower Earnings Limit, you won’t pay NICs, yet you’ll still accrue valuable National Insurance credits.

Can You Use the Tax-Free Personal Allowance on Director’s Salary?

Yes, as a director, you can benefit from the Personal Allowance, which is the amount you can earn before you need to pay income tax. For both the 2024/25 and 2025/26 tax years, this allowance is £12,570. 

For example, if your salary is £14,000, you will only pay income tax on £1,430 (£14,000 – £12,570). As a director, if your salary is below the Primary Threshold, you won’t pay any income tax or NICs as an employee.

Taxation of Dividends

Although dividends aren’t subject to NICs, they are still subject to income tax, albeit at a lower rate compared to regular salary income. The dividend allowance for 2024/25 and 2025/26 is £500, meaning the first £500 of dividend income is tax-free.

It’s also important to note that dividends fall under a separate tax bracket, which is typically lower than the standard income tax rate.

Salaries and Corporation Tax

Director salaries are considered an allowable expense for Corporation Tax purposes. By paying yourself a salary from the company, you can reduce your company’s taxable profits, lowering its Corporation Tax bill. This makes salary payments not only an efficient way to pay yourself but also a way to reduce your company’s tax liability. 

Employment Allowance and Director’s Salaries

The National Insurance Employment Allowance can be used by companies to offset their employer’s NICs. For eligible companies, this allowance is up to £5,000 in 2024/25 and increases to £10,500 in 2025/26.

However, sole directors cannot claim this allowance, meaning they have to consider different salary levels for tax efficiency. If your company has at least two directors, you may be eligible for the Employment Allowance, which can offset employer NICs.

What’s the Best Director’s Salary for Sole Directors in 2025/26

Determining the best salary for a sole director involves weighing up several factors, including the lack of Employment Allowance. As a sole director, your optimal salary might vary depending on your circumstances, but here are a few salary levels to consider:

1. £5,000 Salary (Below the Lower Earnings Limit):
   
   • No National Insurance contributions (NICs) are due.
   • Doesn’t qualify for NIC credits towards the State Pension.
   • The company can still claim tax relief on the salary, reducing its Corporation Tax liability.
2. £6,500 Salary (At the Lower Earnings Limit):
   
   • Earns National Insurance credits for the State Pension.
   • Employer NICs may apply, but this can be offset by tax relief.
   • Suitable for those who want to build State Pension benefits.
3. £12,570 Salary (Primary Threshold):
   
   • Earns full National Insurance credits.
   • Employer NICs apply but are offset by tax relief, reducing Corporation Tax.
   • May affect cash flow and increase payroll costs slightly.

Best Salary for Two or More Director’s

For a company with two or more directors, the most tax-efficient salary is usually £12,570 (the Primary Threshold). This allows directors to take a salary without paying NICs as employees. Additionally, the company can claim the

Employment Allowance, offsetting the employer’s NICs.

What If I Have Other Sources of Income?

If you already have other income that uses up your Personal Allowance, then your director’s salary will be subject to the normal income tax and NICs. In such cases, you might not be able to utilise the tax-efficient strategy of paying a minimal salary and receiving dividends.

Starting a Company Without an Immediate Director’s Salary

If you register your company but delay paying yourself a salary, you can backdate your salary to the incorporation date, as long as it’s within the same tax year. This ensures your salary remains tax-efficient, even if you don’t start taking it immediately.

By understanding the intricacies of National Insurance, Salary Thresholds, and available Tax Reliefs, you can make the most tax-efficient decisions for your director’s salary. 

For tailored advice, it’s always a good idea to consult a professional accountant to optimise your strategy and minimise your tax liabilities.

Get in touch with your Tax Specialist!