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Choosing a tax efficient director salary is one of the first decisions every limited company owner faces each tax year. If you have a limited company, you’re among those enjoying the unique rewards of self-employment—running your own business, making your own decisions, and more. However, as your business begins to grow, one question that often causes stress is how much salary you should draw from the company.
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When paying yourself a salary from your limited company, it’s important to ensure it is tax-efficient. The most common strategy is to combine a low salary with dividend payments to minimise your overall tax liability. That said, there’s no legal limit on how much salary you can pay yourself from the business account.
Your monthly salary is paid to you just like it is to any other employee—though in your case, it’s as a director. However, with the right guidance on applicable Income Tax and National Insurance Contributions (NICs)—especially with changes coming into effect in 2025—it’s crucial to understand how much to pay yourself to optimise your personal finances.
Also, when calculating and processing your salary, make sure you can meet the Real-Time Information (RTI) filing and reporting requirements set by HMRC, which are essential for running payroll. Failing to maintain compliance may lead to fines or penalties. The rules surrounding the issuing of dividends must also be followed properly.
Why Should You Take a Salary as a Director?
As a director of a limited company, taking a salary is worth considering for two key reasons:
- Tax Efficiency – HMRC classifies salary as an allowable business expense. This means it reduces your company’s taxable profit, thereby lowering the amount of Corporation Tax your business has to pay.
- State Pension Eligibility – If the salary you draw exceeds the Lower Earnings Limit, you begin to build up qualifying years toward your State Pension. For the 2025/26 tax year, the Lower Earnings Limit is £6,500, and for 2024/25, it was £6,396.
Why Should I Take a Low Salary?
HMRC states that the National Minimum Wage Regulations do not apply to office holders. These regulations are only relevant if there is an employment contract in place. Office holders are individuals who hold a position in a business but either do not receive a salary or do not have a formal contract of employment.
When you choose to take a low salary, there is no applicable Income Tax or National Insurance Contributions (NICs), provided your salary remains below the Personal Allowance. In the UK, this is the amount up to which your income is tax-free. For both years 2024/25 and 2025/26, the Personal Allowance has been set at £12,570.
While setting your salary as a director of a limited company, it’s important to also consider National Insurance thresholds. If your salary is below these thresholds:
- You are not required to pay employee NICs.
- If it’s also below the Secondary Threshold, the company does not need to pay employer NICs either.
As a director, it’s ideal to set your salary above the Lower Earnings Limit, so you can build qualifying years for the State Pension, but below the thresholds where Income Tax and NICs become payable.
What are National Insurance Thresholds? How Do These Impact The Director’s Salary?
First, the Lower Earnings Limit of National Insurance (NI) –
| Tax Year | NI Lower Earning Limit (£) |
| 2025-26 | 6,500 |
| 2024-25 | 6,396 |
Next, the NI Primary Threshold –
| Tax Year | NI Primary Threshold (£) |
| 2025-26 | 12,570 |
| 2024-25 | 12,570 |
As a director, if your salary is more than the Lower Earnings Limit but less than the Primary Threshold, you do not have to pay employee NI contributions. You will also maintain your State Pension contribution record.
However, remember that if your salary exceeds the NI Secondary Threshold of £5,000 (2025/26) or £9,100 (2024/25), then the company has to pay employer’s NI contributions.
When your company pays Employer’s NI, the profits automatically decrease, which, in turn, reduces the dividend amount paid to shareholders.
Based on the above, what is the most tax-efficient salary for a sole director of a limited company?
In the 2024/25 tax year, a sole director with no other taxable income could draw about £758.33 per month. In the 2025/26 tax year, as per the Autumn Budget 2024, the most tax-efficient salary would be £1,048 per month.
Why Should I Not Take A Very Low Salary As a Director?
A very low salary or a no-salary status has multiple cons. These include:
- Difficulty qualifying for loans or mortgages: You may not be eligible for loans or mortgages. There are specific criteria that need to be met, and a low salary can be a hindrance. It is best to speak with qualified chartered accountants like Taxcan for navigating the ecosystem of self-employed mortgages.
- Limited eligibility for maternity benefits: If you are a woman and want to avail maternity leave, a low or no salary may mean you are not employed and therefore may not receive maternity benefits as per the National Minimum Wage Regulations.
- Loss of personal allowance benefits: If you have no other income source and you take home a salary at the NIC threshold, you may not be eligible for the yearly tax-free personal allowance.
- Insurance cover limitations: Similarly, you may miss out on getting appropriate cover for health insurance, life insurance, or other policies where the payouts are directly proportional to the income.
- Potential issues with National Minimum Wage Regulations: To top it off, there could be some problems with the National Minimum Wage Regulations in case of a Contract of Employment.
Taking Dividends As A Director
If you are the director of a limited company that records profits, you have two options. Option number one is that you can reinvest the profits into your company. The second option is that the profit can be distributed in the form of dividends to shareholders, including you as the director.
Shareholders are owners of the company. Therefore, as the owner of the company, you are a shareholder too and can pay yourself dividends. Taking money out of your limited company as a shareholder can be a tax-efficient way to take payments, as dividends help decrease personal tax.
If you combine salary with dividends, your earnings can be tax-efficient.
What Are The Tax Implications Of A Director’s Salary?
As a director, if you are taking a salary like a full-time employee, you will have to pay tax under the Pay As You Earn (PAYE) system. There are three types of PAYE taxes. This helps reduce the Corporation Tax liability of the limited company.
The three PAYE tax types are:
- Income Tax:
This tax is charged on all earnings generated through employment, as well as other sources. For instance, if you’ve already earned £10,000 from employment in a given tax year, your tax-free Personal Allowance is cut by that amount.
You can use our self-employed tax calculator to get a deeper insight into the tax implications on your income.
- National Insurance Contributions of Employees:
NICs are not cumulative, unlike Income Tax. They must be paid every time a payment is received—whether weekly or monthly. For every new employment, there is a separate earnings threshold. If you are a higher-rate taxpayer, there is a maximum NIC cap you’ll need to consider.
For employees, the threshold is based on monthly income. Any employee who receives a salary above this amount—even if pay is reduced later in the year—will need to pay NICs.
Directors have a yearly threshold instead. This is calculated as 52 times the weekly threshold. If a director’s annual salary crosses this limit, they must pay NICs.
- National Insurance Contributions (NICs) from Employer:
Employer NICs follow a similar threshold-based approach. For the 2024/25 tax year, employers were required to pay National Insurance Contributions at 13.8% for employees whose salaries exceeded the earnings threshold. This same rule applies to salaries drawn by directors.
So, What Is The Best Way Out For A Director?
It is tax-efficient for directors of limited companies to take a salary every month. But how much should the amount be? It should be less than the NI Secondary Threshold of £12,570 per year, or £1,048 monthly. This is applicable for the 2025/26 tax year.
For the 2024/25 tax year, the amount was £9,100 per year and £758.33 per month.
When you decide to pay yourself a salary as a director of a limited company up to the NIC threshold, there are no Income Tax or NI obligations for you. Of course, this is based on the assumption that it is your only source of income, in line with tax-efficiency considerations. You can use our National Insurance Calculator to estimate the amount of National Insurance you may need to pay.
What salary should you take as a company director? This is entirely your choice. However, if you want help making a well-informed decision, you can speak with our expert accountants. Whether you choose to take a higher or lower salary compared to the National Insurance Threshold limit, our accountants will guide you toward the most tax-efficient option.
For any help or further insight, get in touch with us at Cangaf today.
Further reading and official guidance
More guides and tools from our team:
- Salary vs dividend calculator
- Director salary and dividends strategy
- UK dividend tax explained
- Withdrawing funds from a limited company
Official guidance from HMRC and GOV.UK:
