Salary vs Dividends: How Should a Director Pay Themselves?

Why a small salary usually makes sense

A salary set at or near the personal allowance (£12,570 for 2026/27) means you pay no Income Tax on it, and if it stays below that same figure, no employee National Insurance either. In practical terms, this means the first slice of what you take out can come to you completely tax free and it may ensure that you get a qualifying year towards your state pension.

Salary also does something dividends don’t: it reduces the company’s profit, and with it, the Corporation Tax bill. A dividend is paid from profit after Corporation Tax has already been charged, so it doesn’t get that relief.

Where it gets more specific is employer National Insurance, which kicks in at £5,000 (the secondary threshold) at 15%. The Employment Allowance can offset up to £10,500 of that each year, which is why many companies with staff pay a salary up to the full personal allowance and let the allowance absorb the NI. But a company whose only employee is the director themselves can’t claim the Employment Allowance at all, so that same £12,570 salary comes with an employer NI cost that a sole director company doesn’t get relief for. Some sole directors pay a salary set at exactly £5,000 instead, to avoid employer NI altogether. The employer’s NI also attracts corporation tax relief. Which approach actually works out best depends on whether your company has other employees, how much those other employees are paid and whether your business is making a profit, so it’s worth checking rather than assuming.