The old advice was simple: pay yourself £12,570 and take the rest as dividends. But the October 2024 Budget changed that calculation. Employer NI increased to 15% and the threshold dropped from £9,100 to £5,000. Now there are three viable strategies, and the optimal one depends on your circumstances.
Quick Summary: The Three Salary Strategies
Why the Optimal Salary Changed in April 2025
Rachel Reeves' October 2024 Budget made two significant changes to employer National Insurance:
The Budget Changes
Before (2024/25)
- Employer NI rate: 13.8%
- Secondary threshold: £9,100
- Employment Allowance: £5,000
After (2025/26)
- Employer NI rate: 15%
- Secondary threshold: £5,000
- Employment Allowance: £10,500
The combination of these changes means employer NI kicks in at a much lower salary level. Previously, you could pay yourself £9,100 with zero employer NI. Now, employer NI starts from £5,000. For a £12,570 salary, employer NI increased from £479 to £1,136, an additional £657 per year.
The Employment Allowance increased to £10,500, but single-director companies still cannot claim it. You need at least one employee who is not a director, or two directors each earning above the secondary threshold.
The Three Salary Strategies for 2025/26
There's no single "optimal" salary anymore. The best choice depends on your state pension position, cash flow needs, and overall tax planning. Here are the three main options:
Strategy 1: £5,000 Salary
£5,000 Strategy Summary
- Employer NI: £0
- Employee NI: £0
- Income Tax: £0
- State Pension: No qualifying year
- Best for: Directors with 35+ NI years or who don't need state pension
Taking exactly £5,000 means you sit right at the secondary threshold. Zero employer NI, zero employee NI, and well below the personal allowance so zero income tax.
The catch: you won't qualify for a state pension year. You need to earn at least £6,396 (the Lower Earnings Limit) for that. If you already have 35 qualifying years, this doesn't matter. But if you're building towards the full state pension, this strategy costs you future retirement income.
Strategy 2: £6,396 Salary
£6,396 Strategy Summary
- Employer NI: £209
- Employee NI: £0
- Income Tax: £0
- State Pension: Qualifying year preserved
- Best for: Directors building state pension with tight cash flow
The £6,396 figure is the Lower Earnings Limit for National Insurance. At this salary, you qualify for a state pension year despite paying minimal NI contributions.
This is a compromise strategy. You save £927 in employer NI compared to £12,570, but you still get your state pension qualifying year. However, you're not using your personal allowance efficiently. That £6,174 gap (£12,570 minus £6,396) could have been extracted as tax-free salary instead of dividends taxed at 8.75%.
Strategy 3: £12,570 Salary
£12,570 Strategy Summary
- Employer NI: £1,136
- Employee NI: £0
- Income Tax: £0
- State Pension: Qualifying year preserved
- Best for: Most directors (still the default recommendation)
Taking £12,570 uses your full personal allowance. No income tax on salary, no employee NI (your salary is at the NI threshold), and you get a state pension qualifying year.
Yes, employer NI is £1,136. But this is a deductible expense for corporation tax. If your company pays 19% corporation tax, that £1,136 effectively costs £920 after the tax deduction. And you're extracting £12,570 completely tax-free (apart from the employer NI).
Worked Example: £50,000 Profit Extraction
Let's compare all three strategies for a company with £50,000 gross profit available for extraction. We'll assume the director has no other income and wants to take everything possible.
| Strategy | £5,000 | £6,396 | £12,570 |
|---|---|---|---|
| Director Salary | £5,000 | £6,396 | £12,570 |
| Employer NI | £0 | £209 | £1,136 |
| Taxable Profit | £45,000 | £43,395 | £36,294 |
| Corporation Tax (19%) | £8,550 | £8,245 | £6,896 |
| Available for Dividends | £36,450 | £35,150 | £29,398 |
| Dividend Tax (8.75%) | £3,146 | £3,032 | £2,528 |
| Net Take Home | £38,304 | £38,514 | £39,440 |
| State Pension Year? | No | Yes | Yes |
The £12,570 strategy gives the highest take-home pay (£39,440) because salary extracted within the personal allowance avoids all personal taxes, while dividends are taxed at 8.75% after the £500 allowance.
Key insight: Despite higher employer NI, £12,570 salary wins because you're trading 8.75% dividend tax for 0% income tax on that portion. The employer NI (deductible at 19% for corporation tax) is cheaper than the dividend tax you'd otherwise pay.
State Pension: Does It Matter?
The full state pension requires 35 qualifying years. Each qualifying year is worth approximately £324 per year in retirement (based on the 2025/26 full state pension of £11,502 divided by 35).
Check your National Insurance record online at gov.uk. If you have gaps, you can often buy voluntary contributions to fill them. Currently costs around £824 to buy a qualifying year, which gives you £324 per year for life once you retire.
Should You Care About State Pension?
When £12,570 Still Makes Sense
Despite the higher employer NI, taking £12,570 salary is still optimal for most directors. Here's when it's particularly appropriate:
- You're claiming Employment Allowance. If you have employees (not just yourself as director), the £10,500 Employment Allowance wipes out your employer NI completely.
- You have multiple directors. Two directors each earning above £5,000 qualifies for Employment Allowance, making £12,570 salary essentially free of employer NI.
- State pension matters to you. Building qualifying years now is cheaper than buying voluntary contributions later.
- You want to maximise pension contributions. Salary is "relevant UK earnings" for personal pension contributions. Higher salary = higher contribution limit. See our guide to pension contributions for directors.
The Dividend Tax Trap in 2026/27
While you're optimising your 2025/26 salary, be aware that dividend tax rates are increasing from April 2026:
| Tax Band | 2025/26 | 2026/27 | Change |
|---|---|---|---|
| Basic Rate | 8.75% | 10.75% | +2% |
| Higher Rate | 33.75% | 35.75% | +2% |
| Additional Rate | 39.35% | 39.35% | No change |
If you have retained profits in your company, consider whether to take dividends before April 2026 at the current rates. But don't push yourself into a higher tax band just to beat the deadline.
Read our full guide on dividend tax changes for 2026, or see our optimal director salary guide for 2026/27 to plan ahead.
Frequently Asked Questions
What is the optimal director salary for 2025/26?
For most single-director companies, £12,570 remains optimal in 2025/26. This uses your full personal allowance (no income tax), qualifies for state pension, and the additional employer NI cost (£1,136) is offset by the corporation tax deduction. However, if cash flow is tight, £5,000 or £6,396 can work.
Why did the optimal salary calculation change in April 2025?
The October 2024 Budget increased employer NI from 13.8% to 15% and dropped the secondary threshold from £9,100 to £5,000. This means employer NI now kicks in at a much lower salary level, making lower salary strategies more attractive for some directors.
What is the £5,000 salary strategy?
Taking £5,000 salary means zero employer NI (you're at the threshold exactly) and zero employee NI. The downside: you won't qualify for a state pension year. This strategy saves around £1,136 in employer NI compared to £12,570, but you lose state pension entitlement.
What salary do I need for state pension?
You need to earn at least £6,396 (the Lower Earnings Limit) to qualify for a state pension year in 2025/26. At this salary, you'll pay £209 in employer NI but preserve your state pension rights. Each qualifying year is worth approximately £324 in annual state pension.
Should I pay myself £12,570 or take more dividends?
For most directors, £12,570 salary plus dividends is still optimal. The salary uses your personal allowance (no income tax), qualifies for state pension, and is a deductible expense for corporation tax. The employer NI cost is often worth it for the benefits.
Can I claim Employment Allowance as a single director?
No. Single-director companies cannot claim Employment Allowance. You need at least one employee who is not a director, or two directors each earning above the £5,000 secondary threshold. The allowance is £10,500 for 2025/26.
Need Personalised Advice?
Every director's situation is different. Our chartered accountants can review your specific circumstances and recommend the optimal salary structure for your company.