Director Salary 2026/27: Why £12,570 Is the Optimal NI Threshold

Why Director Remuneration Deserves Its Own Strategy

Running your own limited company gives you a flexibility that employed workers simply do not have: you can choose how to extract profit. Instead of receiving everything as salary — where both income tax and National Insurance apply — directors typically combine a modest salary with dividend payments. The result, done correctly, is a legally lower tax bill.

The centrepiece of this strategy in 2026/27 is the £12,570 figure. It appears three times in the UK tax system simultaneously: as the Personal Allowance, as the employee NI Primary Threshold, and as a near-match to the State Pension's Lower Earnings Limit. Understanding why these numbers align — and what to do when they do not — is the foundation of efficient director pay.

The National Insurance Picture for 2026/27

National Insurance affects directors differently depending on which side of the equation you are looking at.

Employee (primary) contributions are paid by the individual on earnings above the Primary Threshold. In 2026/27 that threshold is £12,570 per year. The rate is 8% up to £50,270, then 2% above that. A salary set at exactly £12,570 attracts zero employee NI — you sit right at the threshold, not above it.

Employer (secondary) contributions are paid by the company on earnings above the Secondary Threshold, which is £5,000 per year in 2026/27. The rate is 15%. A £12,570 salary therefore exposes £7,570 of earnings to employer NI, generating a liability of £1,135.50 for the company.

This is where the Employment Allowance becomes critical. In 2026/27 the Employment Allowance is £10,500, and it offsets employer NI pound for pound. For an eligible company — one with at least two directors on the payroll, or directors alongside other employees — the £1,135.50 is wiped out entirely, making the £12,570 salary effectively NI-free on both sides.

Employment Allowance: Who Qualifies and Who Does Not

The Employment Allowance is not available to every company. HMRC excludes companies where the sole employee is also a director. In practice this means:

• Two or more directors on payroll: eligible.
• One director plus at least one other employee: eligible, provided the employer NI liability was below £100,000 in the previous tax year.
• Sole director, no other employees: not eligible.

This distinction matters enormously. For a sole-director company that cannot claim Employment Allowance, a £12,570 salary generates a genuine £1,135.50 employer NI cost. Over a ten-year period that is over £11,000 of avoidable tax paid by the company before it reaches you.

Many sole-director companies therefore set the salary at £5,000 — exactly at the secondary threshold — eliminating employer NI entirely. The trade-off is that earnings between £5,000 and £6,396 (the Lower Earnings Limit) count for State Pension qualifying years, but a salary of £5,000 sits below the LEL and does not. Whether losing a qualifying year matters depends on how many qualifying years you already have toward your State Pension (you need 35 for the full £241.30 per week, equivalent to £12,547.60 per year in 2026/27).

How Dividends Fill the Gap

Once salary is set at £12,570, the Personal Allowance is fully absorbed and any further income from the company is most efficiently taken as dividends. Corporation Tax will already have been paid on the company's profits — 19% for profits below £50,000, rising to 25% above £250,000 with marginal relief in between — so dividends represent post-tax profit being distributed to shareholders.

The dividend tax rates in 2026/27 are:

• Dividend allowance: £500 (tax-free regardless of rate band)
• Basic rate: 8.75% on dividends falling within the basic-rate band (up to £50,270 total income)
• Higher rate: 33.75% on dividends within the higher-rate band (£50,271–£125,140)
• Additional rate: 39.35% above £125,140

A director earning £12,570 in salary can receive a further £500 in dividends free of dividend tax, then up to £37,700 more at the basic rate of 8.75% before hitting the higher rate. Compare that to taking the same amount as salary, which would attract 20% income tax and 8% employee NI, and the advantage becomes clear.

A Worked Example: £50,000 Total Extraction

To make the numbers concrete, consider a director aiming to extract £50,000 from their company in 2026/27, assuming Employment Allowance applies.

Salary component: £12,570

• Income tax: nil (covered by Personal Allowance)
• Employee NI: nil (at threshold)
• Employer NI: nil (covered by Employment Allowance)
• Corporation Tax deduction: the salary is a business expense, saving 19% × £12,570 = £2,388.30 in corporation tax

Dividend component: £37,430

• Dividend allowance: first £500 is tax-free
• Remaining £36,930 at basic rate: 8.75% = £3,231.38
• Total dividend tax: approximately £3,231

Effective tax on £50,000 extraction: roughly £3,231 in personal tax, reduced further by the corporation tax saving on the salary. Compare this to a straightforward PAYE salary of £50,000, where income tax alone would be £7,540 and employee NI would add another £3,016, totalling over £10,500 before employer costs.

The difference is substantial — though it is important to remember that corporation tax has already been paid on the profits from which dividends are drawn, so the full picture requires accounting for that too.

Pension Contributions: The Third Pillar

Salary and dividends are not the only tools available. Employer pension contributions made directly by the company into a director's pension are:

• Not subject to income tax or NI for the director
• Deductible as a business expense for the company, reducing the corporation tax bill
• Limited by the Annual Allowance of £60,000 per year (or 100% of relevant UK earnings, whichever is lower)

For many directors, a combination of a £12,570 salary, dividend distributions up to the basic-rate band, and significant employer pension contributions represents the most tax-efficient structure available. The pension route is particularly attractive for those approaching retirement who want to extract profits without triggering higher-rate dividend tax.

Note that the Money Purchase Annual Allowance (MPAA) of £10,000 applies once you have flexibly accessed pension funds, so planning the sequence of extraction matters.

When the Strategy Needs Adjusting

The £12,570 salary + dividends approach is not universally optimal. Here are the main scenarios where a different structure makes more sense:

You are taking a mortgage: Lenders assess affordability based on declared income. A low salary supplemented by dividends can be treated less favourably by some mortgage providers than pure PAYE employment income. You may need to show two or three years of accounts and SA302 forms. Consider this well in advance of any mortgage application.

Your profits fluctuate: Dividends can only be paid from retained or current-year profits. If your company has a loss-making year, you cannot legally declare a dividend. Salary is always payable (subject to cash flow), so a slightly higher salary provides more certainty.

You have other income: If you have rental income, interest income, or a spouse's salary that already uses the Personal Allowance in full, the calculation changes. Each pound of additional dividend may land in the higher-rate band immediately.

You are close to £100,000 total income: The Personal Allowance tapers above £100,000 at a rate of £1 for every £2 earned, creating an effective 60% marginal rate between £100,000 and £125,140. Directors approaching this threshold should prioritise pension contributions or other allowable deductions to stay below £100,000.

IR35 applies: If your company is caught by IR35 rules — typically where you work through an intermediary for a client who controls how, when, and where you work — the deemed salary rules change the tax treatment entirely. The optimal structure described here assumes IR35 does not apply.

Practical Steps for the 2026/27 Tax Year

Setting the optimal director salary involves both company law and payroll mechanics. Here is what to do in practice:

1. Pass a board resolution formally authorising the director salary at the chosen level. Even as a sole director you should minute this.
2. Register as an employer with HMRC if you have not already done so. Even a below-threshold salary requires a PAYE scheme.
3. Run payroll monthly through HMRC-recognised software and submit RTI (Real Time Information) filings. A single director on payroll can use HMRC's free Basic PAYE Tools.
4. Declare dividends correctly with a board minute and dividend voucher for each payment. Do not simply transfer money and call it a dividend retrospectively.
5. Check Employment Allowance eligibility at the start of the year, and claim it through your payroll software if you qualify.
6. Review the position mid-year if profits are significantly above or below forecast. Adjusting dividend timing can prevent crossing into higher-rate territory unexpectedly.

Summary: Why £12,570 Remains the Benchmark

The alignment of the Personal Allowance and the employee NI Primary Threshold at £12,570 in 2026/27 makes this the default optimal salary for directors of eligible companies. It delivers:

• No income tax on the salary itself
• No employee NI
• A qualifying year for State Pension
• A deductible expense that reduces the company's corporation tax bill
• Full absorption by the Employment Allowance for qualifying companies

For sole-director companies outside the Employment Allowance, the maths shifts toward a £5,000 salary, accepting the loss of a State Pension qualifying year in exchange for eliminating £1,135.50 of employer NI.

Neither figure is carved in stone. Tax legislation changes, personal circumstances vary, and the interaction between salary, dividends, pensions, and other income sources is complex enough to justify professional advice. Use the calculators linked throughout this guide to model your own position before committing to a structure for the year.

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This article is for information only and does not constitute financial or tax advice. Tax rules may change. Consult a qualified adviser for your specific situation.