What UK Limited Company Directors Need To Know About Their Directors Salary
As a limited company director, deciding how much to pay yourself is an important financial and tax planning decision. Each new tax year brings changes to thresholds and rates that can influence your take-home pay, your business’s liabilities, and your entitlement to benefits such as the state pension.
With the 2025/26 tax year now underway, you may be wondering What is the optimum director’s salary this year?
In this guide, we’ll explore the most tax-efficient way to structure your salary as a director in 2025/26, taking into account recent changes to National Insurance, personal allowance thresholds, and your entitlement to the state pension.
Why Your Director’s Salary Matters
If you’re running a limited company, you have slightly more flexibility in how you pay yourself compared to a sole trader. Many directors choose to pay themselves a low salary and top up their income with dividends. This approach can significantly reduce tax and National Insurance (NI) liabilities.
However, finding the sweet spot for your director’s salary involves understanding a few key thresholds and how they interact with your responsibilities as both an employer and employee of your own business.
Key Thresholds for the 2025/26 Tax Year
To determine the most tax-efficient director’s salary, let’s start by looking at some of the key figures for the 2025/26 tax year:
Personal Allowance: £12,570
This is the amount of income you can earn before paying any income tax.
Lower Earnings Limit (LEL): £6,500
Earning above this amount ensures you qualify for National Insurance credits, which count towards your State Pension entitlement, even if you’re not actually paying NI.
Primary Threshold for Employee NI: £12,570
Income above this level is subject to employee National Insurance contributions.
Employer National Insurance Threshold: £5000
Employers must start paying NI when salary exceeds this amount.
Employer NI Rate: 15% (from April 2025)
This is a recent increase and a key factor in determining the optimum salary.
What Happens If You Pay Yourself the Full Personal Allowance as your Director’s Salary?
Some accountants recommend that directors pay themselves a director’s salary of £12,570 per year (or £1,047.50 per month) to make full use of the tax-free personal allowance. At first glance, this makes sense, it maximises your tax-free income.
However, from April 2025, the Employers NI rate has risen to 15%, which means that even though you won’t pay any income tax, your company could still be liable for National Insurance contributions once your salary exceeds Employer National Insurance Threshold
For a salary of £1,048 per month you could incur an employee NI liability of around £94 per month.
So while you’re using the full personal allowance, you’re also incurring potentially avoidable NI liabilities which is why it might not be the most efficient choice for some directors.
Our Recommendation: £880 per Month
At Smart Accountants, we typically recommend a more tax-efficient route: paying yourself £880 per month, which equates to £10,560 annually.
Why this amount?
- It’s above the Lower Earnings Limit (£6,500), so you qualify for NI credits and protect your State Pension entitlement.
- It’s below the employee NI threshold..
- It uses part of your tax-free personal allowance without triggering additional liabilities.
- It leaves room for dividends before hitting the higher tax rate thresholds.
This Director’s salary ensures you’re both compliant and efficient, keeping your company’s costs low while protecting your future benefits.
Why There’s No One-Size-Fits-All Answer
While £880 per month as a Director’s Salary is our standard recommendation for most owner-managed businesses, it’s important to remember that every business and director is different.
There are a few things that can influence the optimum director’s salary, including:
- Whether you have multiple income streams
- Whether your company is eligible for the Employment Allowance
- Your overall profit levels and dividend strategy
- Whether your company has more than one employee
- Your retirement plans, especially if you’re close to pension age
These factors should be considered as part of your overall remuneration strategy, not in isolation.
Final Thoughts
Choosing the optimum director’s salary is about more than just tax efficiency, it’s about balancing your personal income needs, future goals, and your company’s financial position.
While £880 per month is a recommended figure in 2025/26, the best approach is always tailored to your unique circumstances.
At Smart Accountants, we help business owners across the UK understand the full picture, so they can pay themselves in a way that’s compliant, efficient, and sustainable.
Need advice on setting your director’s salary for 2025/26?
Get in touch today for a free consultation and let’s make your business work smarter.
