Last updated: 18 October 2026
A popular way to take money out of a personal or family company is to pay a small salary and extract further profits as dividends. Here is how to set the optimal salary for 2026/27, now that employer’s National Insurance is 15% and starts at just £5,000 a year.
Why Pay a Salary?
There are a number of benefits to paying a small salary from a personal or family company.
Reason 1
If the salary is at least equal to the lower earnings limit for Class 1 National Insurance, which is £6,708 for 2026/27, the year counts as a qualifying year for state pension and contributory benefit purposes. You need 35 qualifying years for the full new state pension, and at least ten qualifying years to get any state pension.
Where the salary is at least equal to the lower earnings limit but does not exceed the primary threshold (£12,570 for 2026/27), you are treated as having paid Class 1 National Insurance at a zero rate. In effect, you get a qualifying year for free.
If you do not yet have 35 qualifying years, paying a small salary is a cheap way to secure another one.
Reason 2
If your available personal allowance is at least equal to the salary, the salary is paid tax-free. Extracting profits from the company without a personal tax bill is always worthwhile.
Reason 3
Salary and any employer’s National Insurance on it are deductible when working out the company’s profits for Corporation Tax. This saves Corporation Tax at 19% where profits are £50,000 or less, at 25% where profits exceed £250,000, and at an effective marginal rate of 26.5% on profits in between, depending on your taxable profits. Dividends, by contrast, are paid out of profits that have already been taxed.
Reason 4
A salary can be paid whatever the level of the company’s profits, even if it creates a loss. Dividends can only be paid if the company has enough retained profits to cover them.
Salary level
The optimal salary depends on your personal circumstances. But because the personal allowance and the National Insurance primary threshold are both £12,570, the position is fairly simple if your personal allowance is available in full.
As a general guide, many directors find a salary of £12,570 a year (£1,047.50 a month) a sensible starting point for 2026/27. At this level there is no income tax and no employee’s National Insurance to pay.
If the Employment Allowance is not available
For a personal company where the only employee is a director, the Employment Allowance is not available. Employer’s National Insurance is then payable at 15% on salary above the secondary threshold of £5,000. On a salary of £12,570, the employer’s National Insurance bill is £1,135.50.
A salary of £12,570 can still make sense, because the salary and the employer’s National Insurance on it are both deductible for Corporation Tax. Whether it beats taking the same money as dividends depends on your company’s Corporation Tax rate and your other income, and the difference is often modest. Some directors prefer a salary of £5,000, so that no employer’s National Insurance is due, or £6,708 to protect their state pension. Your accountant can run the figures for your situation.
If the Employment Allowance is available
In a family company where another family member or employee is also on the payroll and paid above £5,000, the Employment Allowance of £10,500 may be available. There will then normally be no secondary National Insurance to pay on salaries of £12,570.
Above the personal allowance
Once the personal allowance has been used, further salary attracts income tax at 20% and employee’s National Insurance at 8%, plus any employer’s National Insurance. Where profits are taxed at 19% and the Employment Allowance is not available, dividends taxed at 10.75% in the basic rate band are usually the cheaper option. Where the company pays the 25% main rate or 26.5% marginal rate and the Employment Allowance covers the employer’s National Insurance, a higher salary can sometimes beat dividends, so it is worth crunching the numbers.
If your full personal allowance is not available, for example because your income is over £100,000, the optimal salary will depend on your own circumstances and the company’s Corporation Tax rate.
Paying Family Members
Salaries paid to a spouse, partner or other family members must reflect the work they actually do. HMRC can refuse a Corporation Tax deduction for pay that is more than the job is worth. Dividends paid on shares held by family members can make use of their own personal allowances and lower tax bands, but the settlements rules can tax the income on the main shareholder if the shares are not a genuine outright gift of ordinary shares.
Key Figures for 2026/27
- Personal allowance: £12,570
- Lower earnings limit: £6,708
- Secondary threshold (employer’s National Insurance): £5,000
- Primary threshold (employee’s National Insurance): £12,570
- Employer’s National Insurance rate: 15%
- Employment Allowance: £10,500
- Dividend allowance: £500
- Dividend tax rates: 10.75% basic, 35.75% higher, 39.35% additional
Partner Note: ITA 2007, s. 35; SSCBA 1992, s. 5.
