What is the optimal salary for a director of a small company?

Optimal Salary for a Director of a Small Company

Important caveat: The available source materials do not contain any HMRC guidance or legislation that prescribes or recommends an "optimal" director salary as a matter of tax planning. However, the sources do contain the relevant thresholds and rules that inform the commonly discussed strategy. Here is what the law and guidance say:

What the law says

NIC Thresholds (2025–26) — Directors are subject to an annual earnings period for NIC purposes. The key annual thresholds for 2025–26 are:

From 6 April 2025, the Secondary Threshold is set below the Lower Earnings Limit, meaning employer NICs now become payable at a lower level of earnings than the point at which State Benefit entitlement is preserved.

No employee (primary) NICs are payable on earnings between the LEL and the Primary Threshold, but primary contributions are treated as having been paid on earnings at the LEL up to the Primary Threshold — preserving State Benefit entitlement.

Employment Allowance — single director companies excluded: A company cannot claim the Employment Allowance if the director is the only paid employee. This exclusion applies where all earnings payments are made to the same person who is a director of the company.

HMRC guidance / practice

Low salary + dividends is a recognised practice. The Upper Tribunal has noted that "it is a well-known common practice for a sole owner and director of a company to organise matters such that the relevant company pays him or her a low salary and much more substantial dividend payments."

This is further illustrated by tribunal cases where directors were found to pay themselves a modest salary (e.g. £800–£550/month) with the balance paid as dividends, and it was accepted that "this salary and dividend policy minimised the overall tax position."

Single director companies cannot claim the Employment Allowance (from 6 April 2016), meaning there is no offset available against employer NICs on the director's salary if they are the sole employee.

Practical implications from the sources

Based strictly on the thresholds confirmed in the sources, the two salary levels most relevant to the strategy are:

1. £6,500/year (LEL) — No employee or employer NICs are payable, but State Benefit entitlement (e.g. State Pension qualifying year) is preserved. However, from April 2025, employer NICs are triggered above £5,000, so a salary between £5,000 and £6,500 would attract employer NICs at 15% on the excess above £5,000 without yet preserving benefit entitlement.

2. £12,570/year (PT = Personal Allowance) — No income tax is payable (assuming the full personal allowance is available). Employee NICs are also not payable below this level. However, employer NICs at 15% would be due on earnings above £5,000 (i.e. on £7,570), and — critically — the Employment Allowance is not available to single-director companies to offset this cost.

⚠️ This answer describes the legal framework only. The "optimal" salary depends on individual circumstances including whether the Employment Allowance is available, whether the director has other income, pension considerations, and corporation tax deductibility of the salary. You should consult a qualified tax adviser for a personalised recommendation.