Optimal Director Salary for 2026/27: Why £5,000 or £12,570 Matters
The two key National Insurance thresholds that shape the classic director salary-and-dividends strategy, and how the Employment Allowance changes the calculation, in 2026/27.
Quick answer
The classic small-company director strategy — a modest salary plus dividends — hinges on two specific National Insurance numbers: £5,000 (where employer NI starts) and £12,570 (the Personal Allowance and primary threshold). Which one a director should target depends mainly on whether their company can claim the Employment Allowance.
Dividend vs Salary Calculator
Compare taking income as salary vs dividends as a limited company director. See which method saves more tax in 2026/27.
Dividend vs salary calculatorThe £5,000 secondary threshold
Above £5,000 of salary, employer National Insurance (15%) becomes due. For a company that can't claim the Employment Allowance — notably including many single-director companies with no other employees, who are specifically excluded from claiming it — setting salary at or just below £5,000 avoids employer NI altogether, while still registering the director as an employee earning a modest, NI-recordable salary.
The £12,570 primary threshold and Personal Allowance
Setting salary at £12,570 instead uses the full Personal Allowance against salary, meaning no Income Tax is due on that salary at all, and because employee National Insurance is also only due above the same £12,570 primary threshold, the employee side stays at zero too. The catch is employer National Insurance on the portion between £5,000 and £12,570, which is due unless offset by the Employment Allowance.
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
National Insurance calculatorWhere the Employment Allowance changes the answer
The Employment Allowance reduces a qualifying employer's National Insurance bill (up to £10,500 currently), but sole-director-only companies — with no other employees — are specifically excluded from claiming it. Where a company does qualify (because it has at least one other employee alongside the director), the Employment Allowance can effectively absorb the employer NI due on salary between £5,000 and £12,570, making the higher £12,570 figure the more attractive target since it captures the full Personal Allowance with no net additional NI cost.
uk-director-salary-dividend-split-guide-2026Why not zero salary?
Taking no salary at all and relying entirely on dividends avoids all Income Tax and NI on the salary element, but dividends don't count as earnings for National Insurance purposes, meaning a zero-salary year doesn't count as a qualifying year for the State Pension or other contributory benefits. Most director salary strategies therefore still include at least a modest salary specifically to protect this contributory record, even where the pure tax-minimisation answer might otherwise suggest £0.
Bottom line
Check whether your company can claim the Employment Allowance before assuming which threshold — £5,000 or £12,570 — is the right target, and revisit the calculation each tax year as thresholds and rates change.
Sources
- GOV.UK: Employer National Insurance rates and thresholds
- GOV.UK: Employment Allowance
Frequently asked questions
What's the significance of the £5,000 threshold for a director's salary?
£5,000 is the secondary threshold above which employer National Insurance becomes due — a sole director without other employees, and without access to the Employment Allowance, often sets salary at or near this level to avoid triggering employer NI while still qualifying as earned income.
What's the significance of the £12,570 threshold?
£12,570 is the primary threshold and the Personal Allowance — setting salary at this level uses the full Personal Allowance against salary (paying no Income Tax on it) while still only creating a small employee National Insurance liability, since employee NI is also assessed from the same primary threshold.
Does the Employment Allowance change the optimal salary level?
It can — if the company qualifies for the Employment Allowance (which reduces employer National Insurance liability, though sole-director-only companies are generally excluded from claiming it), a higher salary up to £12,570 becomes more attractive since employer NI on the increment from £5,000 to £12,570 may be offset or reduced by the allowance.
Why not just take a salary of £0 and pay everything as dividends?
A salary of at least a small amount is usually still paid to preserve a qualifying year for the State Pension and other contributory benefits, and to use some of the tax-free Personal Allowance against salary rather than leaving it entirely unused, since dividends don't build State Pension entitlement.
Does this optimal salary level change every tax year?
Yes — the primary threshold, secondary threshold and Personal Allowance are all set (and can change) each tax year, so the specific optimal salary figure should be reviewed annually rather than assumed to carry over unchanged from a previous year's calculation.
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