Most Tax Efficient Directors Salary 2026/27
Maximise take‑home pay and minimise tax for company directors.
Most Tax‑Efficient Salary Strategy for 2026/27
For directors of UK limited companies, choosing the most tax‑efficient salary strategy for 2026/27 is a key part of financial planning. The right combination of salary, dividends, and pension contributions can legally reduce income tax, National Insurance Contributions (NICs), and overall tax liability while preserving pension rights.
This guide explains the key tax thresholds and strategies for the 2026/27 tax year to help you structure your pay in the most tax-efficient way.
1. Key Tax Figures for 2026/27
| Tax Element | 2026/27 Threshold / Rate |
|---|---|
| Personal Allowance | £12,570 (tax-free) |
| Basic Rate Limit | £37,700 (after personal allowance) |
| Higher Rate Threshold | £50,270 total income |
| Dividend Allowance | £500 tax-free |
| Dividend Tax Rates | 10.75% basic, 35.75% higher, 39.35% additional |
| NIC Primary Threshold (employee) | £12,570 |
| NIC Secondary Threshold (employer) | £5,000 |
| Lower Earnings Limit (LEL) | £6,708 |
| Upper Earnings Limit / Higher Rate NIC threshold | £50,270 |
2. Why Salary, Dividends & Pension Matter
Directors typically combine these three components to reduce tax:
Salary — counts as a business expense and reduces corporation tax but can trigger NICs.
Dividends — paid from post-tax profits and taxed at lower rates than regular income.
Pension contributions — employer contributions are deductible against corporation tax and avoid personal tax and NICs.
3. Most Tax Efficient Salary Strategy
A. Pay a Low Salary (Tax-Free)
Most directors set their salary around £12,570 per year, which:
Fully uses the personal allowance, so no income tax is due.
Aligns with the employee NIC primary threshold, so no employee NICs are payable.
Builds qualifying years for State Pension and contribution-based benefits.
Employer NICs still apply on earnings above £5,000 but can be reduced if eligible for Employment Allowance.
B. Use Dividend Allowances and Lower Tax Rates
Once salary is set at £12,570:
Take profits as dividends.
The first £500 of dividend income is tax-free.
Dividends above £500 are taxed at:
10.75% (basic rate)
35.75% (higher rate)
39.35% (additional rate)
Tip: Keep total income (salary + dividends) below £50,270 to benefit from the lower dividend tax rate.
C. Pension Contributions for Directors
Instead of increasing salary above £12,570, consider employer pension contributions:
Reduce corporation tax at applicable rates.
Avoid personal tax and NICs.
Are one of the most tax-efficient ways to extract value from your company.
4. Example: Tax-Efficient Remuneration Structure
Scenario: Company profit allows a £40,000 withdrawal in 2026/27.
| Component | Amount | Tax / NIC Notes |
|---|---|---|
| Salary | £12,570 | No personal tax & no employee NICs |
| Dividends | £26,930 | First £500 tax-free; remainder taxed at 10.75% if within basic band |
| Pension Contribution | £5,000 | Deductible for corporation tax, no NICs |
💡 Total income: £44,500 — stays in the basic rate band and avoids higher dividend tax.
5. Practical Planning Tips
| Tip | Description |
|---|---|
| Keep Salary Under the NIC Threshold | Avoid employee NICs while qualifying for state benefits by keeping salary at or below £12,570. |
| Stay Within the Basic Rate Band | Keep total taxable income under £50,270 to minimise dividend tax and stay in the lower tax band. |
| Use Pension Contributions | Employer pension contributions reduce corporation tax and are not subject to NICs, making them highly tax-efficient. |
| Account for Employment Allowance | If you have other staff or directors, the £10,500 Employment Allowance can reduce employer NICs. |
6. When to Seek Professional Advice
Director remuneration can be complex. Seek professional support if you:
Have multiple shareholders or directors
Want to incorporate loans, benefits, or bonuses
Are approaching higher tax thresholds (£50k, £100k, £125k)
Need pension planning integrated with company strategy
An accountant or tax adviser can tailor a strategy that maximises tax efficiency and compliance.
How Salary Strategy Changes for a Sole Director Without Employment Allowance
For directors operating as the only employee in their company, the Employment Allowance of £10,500 per year is not available. This affects the optimal salary because employer National Insurance Contributions (NICs) will now apply from the secondary threshold.
Key Implications
Employer NICs Become Payable Earlier
For a sole director, the company must pay employer NICs of 15.05% (2026/27 rate) on any salary above the secondary threshold (£5,000).
Even if the director’s salary is kept at the personal allowance (£12,570), the company will incur additional employer NICs, increasing the total cost of paying that salary.
Balancing Take-Home Pay and Total Cost
To reduce overall company costs while maintaining personal tax efficiency, many sole directors choose a salary slightly below the primary NIC threshold for employees (£12,570) or around the secondary threshold for employers (£5,000–£8,000 range).
This keeps employee NICs at zero and minimises employer NICs, while still qualifying for State Pension contributions via the Lower Earnings Limit (LEL).
Salary vs Dividends Trade-Off
Because employer NICs are unavoidable above £5,000, some sole directors may choose a lower salary combined with higher dividends, which are not subject to NICs.
Example: Salary of £8,000 (minimises employer NICs) + dividends to extract the rest of profits keeps total tax cost lower while staying compliant.
Practical Example
Scenario: Sole director with £40,000 available profit.
| Component | Amount | Tax / NIC Notes |
|---|---|---|
| Salary | £8,000 | No employee NICs; minimal employer NICs |
| Dividends | £31,500 | First £500 tax-free; remainder taxed at 10.75% if within basic band |
| Pension Contribution | £500 | Optional; deductible for corporation tax, no NICs |
Result:
Total personal income: £40,000
Employer NICs are minimised, reducing overall company costs.
Employee NICs remain zero, and the salary is still counted towards state benefits.
Key Takeaways for Sole Directors
Employment Allowance not available increases the effective cost of a standard £12,570 salary.
A slightly lower salary can reduce employer NICs without impacting employee NIC liability.
Dividends and pension contributions become even more important for maintaining overall tax efficiency.
Annual planning is recommended to ensure take-home pay is maximised while tax liabilities are minimised.
Frequently Asked Questions
Q: Why not take a salary above £12,570?
A: Once salary exceeds the personal allowance, you start paying income tax and potentially NICs, reducing overall efficiency.
Q: Should I always use dividends instead of salary?
A: Dividends are tax-efficient, but only available if the company has sufficient post-tax profits.
Q: What is the dividend tax allowance for 2026/27?
A: £500 is tax-free before dividend tax applies.
Conclusion
For the 2026/27 tax year, the most tax-efficient approach for directors is:
Salary around £12,570
Supplement with dividends up to the basic rate limit
Consider employer pension contributions
This strategy maximises take-home pay, minimises NICs, and keeps total taxable income in the most favourable tax bands.