PAYE and Director Salaries in 2025/26: What’s the Optimal Setup Now?
One of the key advantages of running a limited company is flexibility over how you take money out of it — and that starts with how much salary to pay yourself as a director.
Get it right, and you’ll stay efficient with both Income Tax and National Insurance. Get it wrong, and you could pay thousands more than necessary — or risk missing out on state pension credits altogether.
In this post, we’ll break down the most tax-efficient director salary for 2025/26, how it fits into your overall profit extraction strategy, and what to consider with PAYE, NIC, and company profits.
Salary vs dividend: why it matters
As a company director and shareholder, you typically have two main ways to extract profits:
-
Salary or bonus — taxed under PAYE and subject to employee and employer National Insurance
-
Dividends — paid out of after-tax profits and taxed via self-assessment at dividend tax rates
Using a low salary plus dividends strategy has long been the most efficient setup for many owner-managed companies.
But with tax thresholds frozen, dividend allowances reduced again, and the Corporation Tax rate now as high as 25%, it’s more important than ever to get the numbers right.
What’s the optimal director salary for 2025/26?
As of the current tax year (6 April 2025 to 5 April 2026), the most common tax-efficient salary level for directors remains:
£12,570 per year
(or £1,047.50 per month)
This is the personal allowance for Income Tax — meaning no income tax is due on this amount (provided you have no other income).
This salary level also:
- Qualifies you for state pension and NI credits (as it’s above the Lower Earnings Limit)
- Incurs no employee’s National Insurance (as it’s below the Primary Threshold)
- Results in no employer’s NIC for small companies using the Employment Allowance
If your company does not qualify for the Employment Allowance (most sole-director companies don’t), then there’s an even leaner option.
Alternative: minimum salary with no NIC at all
For sole director companies not eligible for the Employment Allowance, the most efficient salary is often:
£9,100 per year
(or £758.33 per month)
This is the Secondary Threshold — meaning:
- You still get state pension entitlement (as it’s above the Lower Earnings Limit of £6,396)
- No employee or employer NIC is triggered
- The salary is fully deductible against company profits for Corporation Tax
But: by earning below the £12,570 personal allowance, you’ll waste some of your tax-free band unless you have other income.
This setup works well if you’re taking most income as dividends or already using your allowance elsewhere (e.g. rental income, pensions).
Quick comparison
| Salary Level | Tax/NI Impact |
|---|---|
| £12,570/year | Uses full personal allowance, may trigger NIC unless covered by Employment Allowance |
| £9,100/year | Below NIC thresholds, no PAYE/NIC issues, but wastes some tax-free allowance |
We usually recommend £12,570 if you’re in a multi-director company or can claim the Employment Allowance.
Otherwise, £9,100 keeps things lean and avoids admin or employer NIC costs.
What about National Insurance thresholds?
For 2025/26, here are the key NIC thresholds for directors on the annual earnings method:
- Lower Earnings Limit (LEL): £6,396/year — earn above this and qualify for NIC credits
- Primary Threshold (PT): £12,570/year — above this, employee NIC is due (unless you claim Employment Allowance)
- Secondary Threshold (ST): £9,100/year — above this, employer NIC is due unless exempt
So in effect:
- £9,100–£12,570 = no NIC payable, but if no Employment Allowance, employer NIC applies above £9,100
- Over £12,570 = triggers employee NIC at 12% (plus employer NIC at 13.8%)
The “sweet spot” is often to stay at £12,570, if it can be done without employer NIC — i.e. if you’re in a multi-employee setup or the Employment Allowance is available.
Employment Allowance: who gets it?
The Employment Allowance is worth £5,000 per year and can be used to offset employer NIC bills.
However, you can’t claim it if:
- You’re the only employee/director on payroll
- Your company is caught by off-payroll working (IR35)
- You’re a personal service company with no external employees
This is why many single-director companies stick with £9,100 — to avoid employer NIC altogether.
If you have at least one employee in addition to yourself, you can usually claim it — making £12,570 the more efficient salary.
Bonus strategy: when and how to use it
If your company has had a good year and you want to extract more than the salary + dividend combo, a director’s bonus is an option.
It counts as employment income and is taxed under PAYE, but:
- It is a tax-deductible expense for Corporation Tax
- It may help bring profits under Corporation Tax thresholds
- It can be timed just before the company year-end to reduce tax for that year
The downside is that it triggers PAYE and NIC liabilities immediately — so it’s less efficient than dividends for most directors, but still useful in certain cases.
Dividends in 2025/26: shrinking allowances
In 2025/26, the dividend allowance is now just £500. This is the amount you can receive tax-free.
Above this, dividend income is taxed at:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
This means more of your dividend income will now be taxed — especially if you take significant amounts from the company.
Many directors are using a blend of:
- Salary up to £12,570
- Dividends to use the basic rate band (up to £50,270 total income)
- Pension contributions or retained profits if income goes higher
We can help structure this based on your personal tax position and goals.
Pension contributions: another layer of planning
If your company is sitting on retained profits, consider using employer pension contributions:
- They are fully deductible for Corporation Tax
- Do not count as income for the director
- Can reduce personal income below key thresholds (e.g. £100k taper)
- Help build long-term value outside of dividend taxes
You can contribute up to £60,000 per year (more if unused allowances exist via carry forward). This works best as part of a wider salary/dividend/pension strategy.
Final thoughts
The best director salary for 2025/26 depends on your company structure, Employment Allowance eligibility, and broader income goals — but in most cases, it still comes down to one of two figures:
- £12,570 if Employment Allowance is available
- £9,100 if it’s not
From there, dividends, bonuses, and pension contributions can all be layered in to create the most efficient structure.
At Merranti Accounting, we build personalised profit extraction strategies based on your income level, company profit, personal tax position, and future plans. Whether you’re just setting up, or reviewing before year-end, we’ll help you make every pound work harder — and smarter.
Not sure what salary to take this year?
Book a Director Remuneration Review with Merranti and get your 2025/26 structure locked in before April.