Directors Salary 2026/27: Common Myths and Mistakes to Avoid

Directors Salary 2026/27: Common Myths and Mistakes

Setting your directors salary for the 2026/27 tax year is one of the most important decisions you’ll make as a limited company director. Get it wrong and you could overpay tax or miss out on NI credits. Yet many common myths persist. Let’s separate fact from fiction using the latest official rates.

Myth 1: The Lower the Salary, the Better

Some directors believe taking a minimal salary (e.g., £6,708 – the Lower Earnings Limit) is best because it avoids employer National Insurance. That used to be sensible when the secondary threshold was £9,100 and you could pay a salary up to that point with zero employer NI. But from April 2025, the secondary threshold dropped to £5,000 and the employer NI rate rose to 15%. Now, any salary above £5,000 attracts employer NI immediately. NetRate’s analysis confirms that for most solo directors, £12,570 (the Personal Allowance) is optimal. The employer NI cost of about £1,136 on the £7,570 slice above £5,000 is offset by corporation tax relief of around £301 (at the marginal 26.5% rate) plus income tax savings from swapping salary for dividends. Your net take-home improves compared to a lower salary.

Myth 2: £9,100 is Still the Sweet Spot

Afterax explains that £9,100 was historically the secondary threshold, but it has no special meaning for 2026/27. Some accountants still recommend it out of habit. In reality, paying £9,100 incurs employer NI on £4,100 (£9,100 – £5,000) at 15% = £615, but you then leave part of your Personal Allowance unused. You could take that remaining £3,470 as dividends taxed at 0% (covered by Personal Allowance) but you lose the corporation tax saving you would have got if that amount were salary. Run the numbers: the net cost to the company is usually higher than at £12,570. Only if you have other income that uses your Personal Allowance, or if you want to stay below the NI primary threshold for employee NI, might a lower salary make sense.

Myth 3: Employment Allowance Will Cover My Employer NI

Many directors assume they can claim the £10,500 Employment Allowance to wipe out employer NI. The reality is that most single-director companies cannot claim it. HMRC specifically excludes companies where the only employee paid above the secondary threshold is a director. If you employ someone else (e.g., a spouse or part-time worker) who earns over £5,000, you may qualify. But for the classic one-person limited company, you cannot use Employment Allowance. Afterax confirms this point: “Most single-director companies cannot claim it.”

Myth 4: Dividends Are Always More Tax-Efficient Than Salary

Dividends avoid employer NI and employee NI, but they are not corporation-tax-deductible. Salary saves corporation tax on every pound paid. For 2026/27, with the dividend allowance down to £500 and dividend tax rates increased to 10.75% / 35.75% / 39.35%, the balance has shifted. Using the Personal Allowance via salary still gives tax-free income up to £12,570. Beyond that, dividends are taxed at basic rate (10.75% after the £500 allowance), which is lower than the 20% basic rate of Income Tax on salary. But employer NI on salary above £5,000 and employee NI above £12,570 mean dividends often win for income above the Personal Allowance. The optimal strategy for most is: salary = £12,570, then dividends up to the basic rate band (£50,270 total income), then consider employer pension contributions for anything extra.

Myth 5: Scottish Tax Bands Don’t Affect Directors

If you live in Scotland, different Income Tax bands apply. The starter rate (19%), basic rate (20%), intermediate rate (21%) and higher rate (43%/44%) thresholds differ from England. The Personal Allowance is the same (£12,570), but the point at which higher-rate tax kicks in is lower (£43,662 for the intermediate rate and £50,000 for the higher rate in 2025/26 – check HMRC for 2026/27). This can change the calculus for dividend taxation because the dividend tax rates follow your total income band. A director in Scotland paying higher rate on income above about £43,000 will face 35.75% dividend tax sooner than in England. Always adjust your salary/dividend split for Scottish rates. Use our take-home calculator to model the Scottish scenario.

The Bottom Line

For the vast majority of single-director limited companies in 2026/27, the optimal directors salary is £12,570. It uses your Personal Allowance, provides a qualifying year for State Pension, and the employer NI cost is outweighed by corporation tax relief. If you have other income, or want to minimise employer NI while still getting NI credits, consider £6,708 (the Lower Earnings Limit). The old £9,100 figure is obsolete. And remember: the most tax-efficient way to extract profit beyond the basic rate band is usually an employer pension contribution rather than additional dividends. For more detailed guidance, read our salary articles on director remuneration strategies.

Frequently Asked Questions

Is £9,100 the optimal director salary for 2026/27?

No. The £9,100 figure was the old secondary National Insurance threshold; it has no special meaning for 2026/27. The secondary threshold was cut to £5,000 in April 2025. The optimal salary for most solo directors without Employment Allowance is now £12,570 (the Personal Allowance), despite incurring employer NI on the slice above £5,000. The employer NI cost is usually outweighed by corporation tax relief on the salary plus employer NI.

Can I claim Employment Allowance as a single director?

Generally no. The £10,500 Employment Allowance can reduce employer NI, but HMRC excludes companies where the only employee paid above the secondary threshold is a director. Most single-director limited companies cannot claim it. If your company has at least one non-director employee earning above the secondary threshold (£5,000), you may be eligible.

How do dividends interact with my director salary for tax efficiency?

Dividends are taxed after the salary and personal allowance. For 2026/27, the dividend allowance is £500; dividends beyond that are taxed at 10.75% (basic rate), 35.75% (higher rate), or 39.35% (additional rate). Taking a salary of £12,570 uses your personal allowance, so dividends can be taken within the basic rate band (£12,571–£50,270) at 10.75% (minus the £500 allowance). Above that, rates increase. Many directors then prefer employer pension contributions over additional dividends to avoid higher tax.