Tax Planning for High-Earning Company Directors
A salary of £6,708 earns you a full year towards the State Pension. You pay no income tax on it and no personal National Insurance. A director who takes no salary at all may earn nothing towards the State Pension for that year.
That one fact surprises almost every new client who walks into our office. They have been told, often by a friend or a website, that the best salary for a director is "the lowest possible" or "just under the National Insurance threshold". Both rules of thumb are close to right and still wrong enough to cost money.
So how much should you take? The honest answer is that it depends. But it doesn't depend on guesswork. It depends on a small number of figures that you can look up, and I will take you through each of them. I work with company directors across Tunbridge Wells, Tonbridge, Sevenoaks and Maidstone, and the same pattern appears again and again: the right salary is usually one of three numbers, and which of the three depends on your company's size, your family situation and your plans.
This guide explains why salary matters, how tax and National Insurance apply, what the State Pension needs from you, and how salary compares with dividends. I have used the 2026–27 figures throughout, and I have worked through a full example so you can see the effect on real money.
Most directors think of salary as a matter of income. It is also a matter of tax, benefits and record keeping. Let's look at each in turn.
When a company pays you a salary, the payment is a business expense. It reduces the company's profit and therefore the Corporation Tax it pays. Employer's National Insurance on that salary is also a deductible expense. For a company paying the 19% rate, every £1,000 of deductible cost saves £190 in Corporation Tax. In the marginal relief band, where the effective rate on extra profit is 26.5%, it saves £265.
Dividends do not work this way. They are paid out of profit after Corporation Tax and are not deductible. This difference is a large part of the reason that the salary-versus-dividends question is not as simple as it first looks.
A salary of the right size keeps your National Insurance record intact. That matters for the State Pension, which I cover in detail below. It also matters for other contributory benefits. And it can matter when you apply for a mortgage or a loan, because lenders like to see regular, documented income, even though many also look at dividends.
If your salary is too low, you may waste your Personal Allowance, lose a State Pension year, and give up a tax deduction for the company. If it is too high, you pay National Insurance that you did not need to pay, and you move income into a tax band where it costs more than a dividend would. The aim is to find the point where you gain the benefits without paying more than you must.
A few years ago I met a web developer in Maidstone who had been taking a salary of £30,000 from his one-person company because "that's what my previous employer paid me". He was paying income tax, employee's National Insurance and employer's National Insurance on every pound above the thresholds. When we rebuilt his pay as a smaller salary plus dividends, his combined tax bill fell by well over a thousand pounds a year, and his State Pension record was unaffected. Nothing in his business had changed. Only the mix had.
To choose a salary, you need to know the thresholds. There are five numbers that matter, and they apply from 6 April 2026.
Everyone has a Personal Allowance of £12,570. You pay no Income Tax on income up to that figure. Above it, the basic rate of 20% applies on the next £37,700 of income. The higher rate of 40% applies above that, until income reaches £125,140, where the additional rate of 45% begins.
For most small company directors, a salary at or below £12,570 means no Income Tax on the salary at all.
You, as the employee, start to build a National Insurance record once your earnings reach the lower earnings limit, which is £6,708 a year. Between £6,708 and £12,570, you are treated as having paid National Insurance without actually paying any. This is the sweet spot for the State Pension.
You begin to pay employee's National Insurance only above the primary threshold of £12,570. The rate is 8% on earnings up to £50,270 and 2% above that.
The company pays employer's National Insurance at 15% on earnings above the secondary threshold of £5,000. That is lower than the primary threshold, which is why a salary of £12,570 still costs the company something even though you pay nothing personally.
On a salary of £12,570, the employer's National Insurance is 15% of £7,570, which is £1,135.50. On a salary of £6,708, it is 15% of £1,708, which is £256.20. On a salary of £5,000, it is nil.
Some employers can claim the Employment Allowance, which reduces their employer's National Insurance bill by up to £10,500 a year. But a company whose only employee is the sole director generally can't claim it. If you employ other people, such as an assistant or a second director who is paid above the secondary threshold, the allowance may apply. That can change the whole calculation, because employer's National Insurance becomes effectively free up to the allowance. Ask us before you hire.
Let me put the three most common salary levels side by side in words.
A salary of £5,000 costs the company £5,000 and no National Insurance. It saves some Corporation Tax. But it falls below the lower earnings limit, so you don't earn a qualifying year for the State Pension, unless you fill the gap with voluntary contributions.
A salary of £6,708 costs the company £6,708 plus £256.20 of employer's National Insurance. You pay no tax and no employee's National Insurance. You earn a qualifying year. This is the minimum for most directors who want to protect their State Pension.
A salary of £12,570 costs the company £12,570 plus £1,135.50 of employer's National Insurance, a total of £13,705.50. You pay no tax and no employee's National Insurance, and you earn a qualifying year. Because the whole cost is deductible, a company paying the 19% rate recovers about £2,604 of it in Corporation Tax. The net cost is about £11,100. This uses your whole Personal Allowance.
Directors' National Insurance is normally worked out on an annual basis, not month by month, which is different from ordinary employees. In practice, this means that the thresholds above apply to your total pay for the tax year. Many directors pay themselves a regular monthly amount, such as £1,047.50, and let the payroll software handle the annual calculation. Please speak to us if you want to pay yourself irregularly or in lumps, because it can change the monthly arithmetic.
The State Pension is the part of your retirement planning that most directors forget, because it seems a long way off. It is also the one place where a small salary decision can have a large and lasting effect.
The full new State Pension for 2026–27 is £241.30 a week, which is £12,548 a year. It is paid for life, and it rises each year. For a couple, that is a meaningful part of retirement income.
To receive the full amount, you normally need 35 qualifying years of National Insurance contributions or credits. With fewer, you receive a reduced amount, and you need at least 10 qualifying years to receive anything. Each qualifying year is worth roughly one thirty-fifth of the full pension, which is about £359 a year in today's terms, for the rest of your life. That is a handsome return on a salary decision that may cost you £256.20 in employer's National Insurance.
A tax year counts as a qualifying year if your earnings reach the lower earnings limit of £6,708. A salary of £6,708 or more earns the year, even though you have paid no employee's National Insurance on it. A salary below £6,708 doesn't earn it, unless you make voluntary contributions or receive credits from another source, such as Child Benefit for a child under 12.
This is why I regard £6,708 as the minimum sensible salary for most directors, and why a salary of £5,000, though it avoids employer's National Insurance, is a false economy. The few hundred pounds saved can cost you a qualifying year.
Before you decide, check your National Insurance record on GOV.UK. It shows your qualifying years to date, any gaps, and a forecast of your State Pension. Many people discover gaps they did not know about, from time spent abroad, in education or between jobs. Some gaps can be filled with voluntary contributions, but the deadlines are limited, so look early.
If you already have 35 qualifying years, or you will reach them well before State Pension age, an extra year adds nothing to your pension. In that case, the salary decision turns purely on tax. Equally, if you have other earnings, such as a part-time employment or a second company that already gives you a qualifying year, you might not need your own salary to do so. This is where individual advice is worth having.
This is the heart of the question, and it is where the numbers repay a close look. Our guide to salary versus dividends and our guide to dividend tax explained give the longer version. Here is the practical summary.
Suppose you want to extract an extra £1 of profit from the company, beyond your Personal Allowance. Which route leaves you with more?
For a basic rate taxpayer, dividends win. Paid as a dividend, £1 of pre-tax profit becomes about 72p for you if the company pays the 19% rate, or about 66p if it is in the marginal relief band. Paid as salary, the same £1 first has to cover employer's National Insurance, then you pay 20% Income Tax and 8% employee's National Insurance. You end up with about 63p.
For a higher rate taxpayer, the gap is narrower. After the April 2026 increases, dividend tax at the higher rate is 35.75%, so £1 of company profit paid as a dividend leaves you with about 52p if the company pays 19%, or about 47p if the company is in the marginal relief band. Extra salary doesn't close the gap, because it attracts 20% Income Tax, 8% employee's National Insurance and 15% employer's National Insurance, and it also pushes some of your dividends up into the higher rate band. I ran the numbers for a company with £200,000 of profit, and each extra £1,000 of salary above £12,570 reduced the director's take-home pay slightly. Dividends still come out ahead at the margin, but by less than before, which is why other tools, such as employer pension contributions, matter more as your income rises.
Let me show you how it looks with real money. A Tunbridge Wells consultancy has £60,000 of profit before paying its director. The director has no other income and the company has no other employees. I have compared the director's total take-home pay, the salary plus the dividend after all taxes, for different salaries.
With no salary, the company pays £12,150 in Corporation Tax and distributes £47,850 as a dividend. The director's Personal Allowance covers part of it, and the dividend tax is £3,738.85. The director takes home £44,111.15.
With a salary of £5,000, there is no employer's National Insurance. The company pays £10,825 in Corporation Tax and distributes £44,175. Dividend tax is £3,881.29. The director takes home £45,293.71.
With a salary of £6,708, the company pays £256.20 of employer's National Insurance and £10,304.49 of Corporation Tax, and distributes £42,731.31. Dividend tax is £3,909.70. The director takes home £45,529.61.
With a salary of £12,570, the company pays £1,135.50 of employer's National Insurance and £8,795.95 of Corporation Tax, and distributes £37,498.54. Dividend tax is £3,977.34. The director takes home £46,091.20.
With a salary of £20,000, the director begins to pay employee's National Insurance and Income Tax on the excess, and the company pays more employer's National Insurance. The director takes home £45,186.89, which is lower than at £12,570.
The pattern is clear. Moving from no salary to £12,570 adds £1,980 to the director's take-home pay. Paying above £12,570 costs more than it gains. And £6,708 beats £5,000 even on pure money, before you count the State Pension year. The total tax paid across the company and the director is lowest, at £13,908.80, with the £12,570 salary.
For many one-person companies with a profit like this, a salary of £12,570 is the best choice, with dividends for the rest. If the company's profit is smaller, or if the employer's National Insurance feels burdensome, £6,708 is the next best.
There are cases where a higher salary is right. If you employ other people and the Employment Allowance is available, the employer's National Insurance on your salary may effectively be free, which tips the balance. If you want to maximise the pay on which a personal pension contribution is based, a higher salary can help. If you are applying for a mortgage and the lender focuses on salary, a higher figure may be useful for a while. And if your company has a very low profit, a bigger salary might be the only way to take any money out lawfully.
Employer pension contributions don't depend on your salary in the same way. A company can pay into your pension without increasing your salary or your dividends, and without National Insurance. For directors whose dividends are heading into the higher rate band, it is often the best of the three options. Our guide to whether your limited company can pay into your pension covers the details.
Let me turn the general points into specific starting positions. Treat these as starting points for a conversation, not as advice for your own case.
For most, a salary of £12,570 is the best starting point, particularly if the company is profitable. If the company is smaller, or you want to minimise employer's National Insurance, £6,708 is the sensible floor. Salaries between those two figures have little to recommend them.
If you have staff, the Employment Allowance may be available. That can make a higher salary for you cheaper than it looks. It is worth having a proper calculation before hiring your first employee.
If two directors are paid, each has their own Personal Allowance and thresholds. A spouse who truly works in the business can be paid a salary for the work they do, subject to it being a reasonable amount. That is a different matter from sharing dividends, which has its own rules. Our guide on dividend tax explains the care that is needed.
If you work through your own company for clients, the position is the same, but you should also check whether the off-payroll working rules apply to your contracts. Those rules can change who pays tax and National Insurance on what you earn. Please ask us if you are not sure.
If profit is low, a salary can still be sensible for the State Pension, but it will create a loss, which may be carried forward. In a start-up year, it can make sense to take only the lower salary of £6,708, or to take a salary only when there is cash to pay it. The company must be able to afford the salary. A salary that cannot be paid on time creates a director's loan or arrears that need to be sorted out.
To pay a salary, the company must register as an employer with HMRC, run payroll through approved software, and report each payment to HMRC at or before the time you are paid. A salary at or above the lower earnings limit must be reported, so if you choose £6,708 or £12,570, expect to run payroll. We can set up and run this for you.
A salary that is declared but not paid ends up as a balance owed to you by the company. That is perfectly lawful, but it should be recorded properly. If the company later cannot pay, the amount is a debt.
The thresholds are updated most years, and the dividend rates changed in April 2026. A salary that was ideal two years ago may not be today. Each autumn, check the salary, dividend and pension mix together. Our year-end tax planning checklist gives you a sequence to follow.
Quick answer: For 2026–27, most sole directors choose between two salaries: £6,708, which earns a State Pension year without any personal tax or National Insurance, and £12,570, which uses the full Personal Allowance and often gives the best overall result when the company is profitable. The rest is usually taken as dividends.
What this means for a company director: Salary is deductible for Corporation Tax and protects your State Pension record, so taking none is rarely wise. But salary above £12,570 attracts Income Tax and National Insurance, and for most directors costs more than dividends. The right figure depends on your profit, your other income, whether you have staff and how close you are to the higher rate threshold.
Example: A consultancy with £60,000 of profit before director pay leaves its director with £44,111.15 if no salary is taken, £45,529.61 on a salary of £6,708 and £46,091.20 on a salary of £12,570. A salary of £20,000 reduces the figure to £45,186.89. Total tax is lowest at £12,570.
Common mistakes: Taking no salary at all. Taking £5,000 to avoid employer's National Insurance but missing a State Pension year. Paying a salary above £12,570 without checking the cost. Forgetting that the Employment Allowance is not available to a sole-director company. Not running payroll properly.
When should you speak to an accountant? When you set up the company, when you first hire an employee, when your profit changes noticeably, when you approach the higher rate threshold, and each autumn before the tax year ends. Speak to us too if you plan to apply for a mortgage or want to bring a spouse into the business.
It can seem tidy to take dividends only. But you lose the Corporation Tax deduction and possibly a State Pension year. In my experience, the extra tax is usually greater than the National Insurance saved.
Many websites suggest a salary just above the secondary threshold of £5,000 to avoid employer's National Insurance. That is outdated advice for most directors, because £5,000 sits below the lower earnings limit of £6,708.
Thresholds change and so do dividend rates. Review the figure every year.
A higher salary adds National Insurance on both sides, and it can move you towards a higher tax band. It is not a free choice.
If you employ someone, the Employment Allowance can transform the arithmetic. If you do not know whether you qualify, ask.
A salary that has been run through payroll but not paid creates a debt. A salary that has been paid without running payroll creates a compliance problem. Both are avoidable.
The Autumn Budget is due on 28 October 2026. What I have written is correct for October 2026, so check the position again before changing your pay.
If you would like to know the right salary for your own company, we'd be glad to help. At Peter Hodgson & Co, we work with sole traders, contractors and company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the rest of Kent and the South East. We can model different salary levels using your own figures, set up your payroll and plan your dividends and pension alongside it.
To arrange a conversation, you can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk. A short conversation now could be worth far more than the cost of it!
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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