Tax-efficient salaries for 2026/27: What directors need to know

As we head into the 2026/27 tax year, salary planning remains a core tool for directors and owner-managed businesses looking to keep tax liabilities under control while maintaining company profitability.

Although the headline income tax and national insurance thresholds remain broadly unchanged, one key adjustment – the increase in the lower earnings limit (LEL) to £6,708 means that salary strategy still deserves careful consideration.

Below we outline the most tax‑efficient director salary levels for the year ahead, and the practical impact each option has on both the company and the individual.

1. The key thresholds for 2026/27
   – Personal allowance: £12,570
   – Lower earnings limit: £6,708 (Increased from £6,500)
   – Primary threshold (Employees’ NI): £12,570
   – Secondary threshold (Employers’ NI): £5,000
   
   These thresholds form the basis on which the most efficient salary levels are assessed. Notably, income tax and employees’ NIC only start once earnings exceed £12,570, while employers’ NIC kicks in above £5,000.
   
   
2. Salary option A: £5,000 – the basic, hassle-free level
   For those seeking minimal admin and no payroll deductions, the £5,000 salary remains a straightforward option.
   
   There is:
   – No income tax
   – No employers’ or employees’ NICs
   – No qualifying year for state pension
   – Reduced paperwork – no PAYE scheme required
   – A corporation tax saving of £950 (19% of £5,000)
   
   This option suits low-touch companies but sacrifices state pension credits.
   
   
3. Salary option B: £6,708 – securing a state pension year
   With the LEL now at £6,708, this salary level ensures the director receives a qualifying year towards the state pension, without triggering any employee NIC.
   
   Key impacts:
   – No income tax
   – Employer NIC of £256.20 (15% on earnings above £5,000)
   – Corporation tax saving increases to at least £1,323.20
   
   This level strikes a balance – still low maintenance but ensuring valuable long-term pension benefits.
   
   
4. Salary option C: £12,570 – the most tax-efficient level for single-director companies
   For 2026/27, the full personal allowance salary of £12,570 remains the most tax-efficient salary where the company cannot claim the employment allowance.
   Although employers’ NIC rises to £1,135.50, the corporation tax relief more than offsets it, giving a net benefit of £401.50 compared with the £6,708 salary.
   For many single-director companies, this continues to be the optimal strategy.
   
   
5. Salary option D: £12,570 – where the employment allowance is available
   Companies with two or more employees often qualify for the employment allowance (EA).
   
   When EA applies:
   – Employers’ NIC of £1,135.50 is fully eliminated
   – No income tax or employees’ NIC is due
   – The company is £1,065.10 better off per employee compared with the £6, 708 salary
   
   This is the standout option for companies with wider payrolls.
   
   
6. Summary
   The below summarises the cost differences between the three most common salary points.
   
   £6,708 salary → modest NIC cost, pension year secured
   £12,570 salary (no EA) → most efficient for single directors
   £12,570 salary (with EA) → overwhelmingly the best outcome for companies with 2+ employees
   
   
7. What should you do next?
   Choosing the right salary level depends on:
   
   – Whether you wish to secure a State Pension year
   – Whether the company is eligible for the Employment Allowance
   – Your broader profit extraction strategy (e.g., dividends, benefits, pension contributions)
   – Company cashflow and administrative preferences
   

As always, we recommend revisiting salary planning alongside dividend strategy to ensure a fully integrated approach to personal and corporate tax efficiency.