Single-director limited companies have the most tax-flexible payroll setup in the UK, but the "optimal" salary has moved twice in three years, and the default answer from 2022 no longer works. This article covers why the Secondary Threshold drop to £5,000 changed the maths, how the annual PAYE scheme reduces reporting to one submission per year, and when you still want a higher salary despite the NI cost.
The Four Thresholds You Need
| Threshold | 2026/27 Annual | What It Triggers |
|---|---|---|
| Lower Earnings Limit (LEL) | £6,500 | Earn above this and the year counts towards State Pension. |
| Secondary Threshold (ST) | £5,000 | Employer NI (15%) kicks in on earnings above this. |
| Primary Threshold (PT) | £12,570 | Employee NI (8%) kicks in on earnings above this. |
| Personal Allowance | £12,570 | Income Tax kicks in on total earnings above this. |
The ordering matters. Until April 2025 the Secondary Threshold sat at £9,100, below the Primary Threshold. A director could take £12,570 of salary and trigger only a small slice of employer NI. From April 2025 the ST dropped to £5,000 and the employer NI rate increased to 15%. That double move made the £12,570 "optimal" salary significantly more expensive for small companies that cannot claim Employment Allowance.
Scenario 1: Sole Director, No Other Employees
This company is not eligible for Employment Allowance (HMRC specifically excludes single-director companies from claiming it). Every pound of salary above £5,000 attracts 15% employer NI on top of whatever personal Income Tax applies.
Taking £5,000 as salary:
- -Salary is corporation-tax deductible at 19% (or higher in the Marginal Relief band), effective CT saving £950.
- -No employer NI because it's at the ST.
- -No employee NI because it's below the PT.
- -No Income Tax because it's below the Personal Allowance.
- -But below the LEL of £6,500, so the year does not bank a qualifying year for State Pension.
Most directors prefer to bank the qualifying year. Taking £6,500 instead costs the company £225 in employer NI (15% of £1,500) but secures a year of State Pension contributions, worth significantly more than £225 in pension terms. Take £12,570 instead and the employer NI cost rises to £1,135.50 (15% of £7,570), which rarely beats extracting the same £6,070 as dividends once Corporation Tax on the retained profit is factored in.
2026/27 Rule-of-Thumb: Take £6,500
For a sole director with no other earnings, a salary of £6,500 is the practical optimum: it banks the State Pension year while minimising employer NI. Anything above this is generally better extracted as dividends. This only holds where you have sufficient distributable reserves, if the company hasn't made enough profit, dividends aren't legally available.
Scenario 2: Two Directors or a Director Plus One Employee
Once a second person is on the payroll earning above the Secondary Threshold, the company qualifies for Employment Allowance, £10,500 of employer NI relief per year. The maths flips: salary up to £12,570 per director now makes sense because the employer NI is absorbed by the allowance.
Two directors each on £12,570 incur £2,271 of employer NI between them (15% of £7,570 x 2). Employment Allowance covers this in full. Total salaries: £25,140, fully deductible for Corporation Tax, generating a CT saving of £4,777 at 19%. The household extracts the same amount more tax-efficiently than the sole-director structure.
The caveat HMRC enforces: the second person must be doing genuine work at a commercial rate. Paying a non-working spouse a salary they could not justify at market rate is reviewable under the Settlements legislation (ITTOIA 2005 s624) and the National Minimum Wage framework. We evidence roles, hours and duties at the time the salary is set, not years later when enquiry arrives.
The annual payroll scheme
By default HMRC expects monthly FPS submissions, twelve a year, every one on or before payday. For a director-only company paying the same amount once a year, that's eleven redundant filings. The annual scheme lets you:
- -nominate a single payday per tax year;
- -file a single FPS for the full annual salary on that date;
- -file no EPS for the other eleven months.
Setup requires notifying HMRC in writing (usually via the PAYE Online helpdesk) that you operate an annual scheme and which month is your payday. Without notification, HMRC's system will issue automatic penalty notices for the eleven "missing" monthly FPS submissions. Once annual status is set, P60s are still required for 31 May and Year-End procedures are unchanged.
When a higher salary makes sense
Three scenarios where we push salaries above £12,570 despite the NI cost:
- Mortgage affordability. Lenders typically only underwrite dividend income after two years' track record. A director on track for a mortgage application in the next 18 months may want to push salary higher to build a clean PAYE record.
- Pension contribution headroom. Personal pension contribution relief is capped at your "relevant earnings", essentially salary, not dividends. If you want to contribute £60,000 personally (the annual allowance), you need at least that much salary. Employer pension contributions side-step this but some clients prefer personal contributions for flexibility.
- Student loan offset. Student loan deductions are computed on total relevant income, so a high dividend strategy doesn't escape them. In some cases a modest salary bump triggers the deduction against better-positioned dividends.
Working out the right salary for 2026/27
- Does the company have two or more people on payroll earning over the ST? -> Salary of £12,570 each, claim Employment Allowance.
- Are you a sole director needing a qualifying State Pension year? -> Salary of £6,500.
- Sole director not needing the pension year? -> Salary of £5,000.
- Mortgage, pension or other personal-income reason? -> Work through the specific case; optimum may be higher.