As a director of a limited company, you get to decide how much to pay yourself. Generally, the most tax efficient way to do this is through a small salary which is topped up by dividends.
What Are National Insurance Rates and Thresholds?
You are liable to pay National Insurance as the ‘employee’ and the ‘employer’. This means that you are effectively paying twice on the same earnings which is the reason for keeping the salary as little as possible. In order to determine the most appropriate level, you need to first understand the different rates and thresholds of National Insurance that may apply.
Threshold 1 – Lower Earnings Limit
The Lower Earnings Limit is set at £6,500 for 2025/26 and it is the level above which you start accruing National Insurance ‘credits’ which will entitle you to the State Pension.
Threshold 2 – Primary Threshold
The Primary Threshold is set at £12,570 for 2025/26 and it is the level above which employees start making National Insurance contributions at the 8% rate.
Threshold 3 – Secondary Threshold
The Secondary Threshold is set at £5,000 for 2025/26 and it is the level above which employers start making National Insurance contributions at the 15% rate.
What Is the Personal Allowance for 2025/26?
The Personal Allowance is set at £12,570 for 2025/26 and it is the amount which you are allowed to earn before you have to start paying Income Tax. Once you start earning more than £100,000 in a given tax year, your Personal Allowance starts to reduce by £1 for every £2 you earn above that amount.
What Is the Most Tax Efficient Salary to Take for 2025/26?
The most tax efficient salary to take for 2025/26 is £12,570.
This amount falls above the Lower Earnings Limit, so it contributes as a qualifying year for your State Pension. Since it does not exceed your Personal Allowance and the Primary Threshold, there is also no Income Tax or employee’s National Insurance.
You might notice that the salary is above the Secondary Threshold of £5,000 which will generate an employer’s National Insurance of £1,135.50 (£7,570 x 15%).
If your company has more than one employee, you may be entitled to the Employment Allowance. This will allow you to reduce your contributions by up to £10,500 which will effectively wipe out the £1,135.50 charge that is generated by your salary.
If you are the only employee of your company, you will not qualify for the Employment Allowance, so you might be asking whether you should just take £5,000 as your salary?
Some people do opt for this option as they want to avoid the headache of making payments to HMRC. However, given that salary expenses are tax deductible through your company, there is still a benefit in taking the £12,570.
Taking the higher amount means that you are generating an additional salary expense of £7,570 for your company (£12,570 – £5,000) along with the associated employer’s National Insurance of £1,135.50 (£7,570 x 15%).
This means that your company is entitled to deduct £8,705.50 (£7,570 + £1,135.50) for Corporation Tax, resulting in a relief of £1,654.04 (£8,705.50 x 19%).
As you can see, the tax relief from taking a higher salary is greater than the cost incurred to the company which makes it the most tax efficient salary to take for directors in 2025/26.