A Guide for UK Limited Company Directors with No Other PAYE Income
As a director of a UK limited company, one of your most important financial decisions is how to pay yourself. With the right structure, you can reduce your tax bill and make the most of your income. But changes to tax rules in the 2025/26 tax year, particularly around National Insurance thresholds and rates, mean it’s time to reassess what’s most efficient.
This guide sets out your main options, the pros and cons of each, and our recommended approach based on current legislation.
What’s Changed in 2025/26?
There have been several important changes this year that impact how directors should approach remuneration:
- The Secondary Threshold for employer National Insurance Contributions (NICs) has dropped from £9,100 to £5,000. This means employer NICs now apply to salaries above £5,000 (unless you qualify for Employment Allowance).
- The Employer NIC rate has increased from 13.8% to 15%.
- The Employment Allowance has increased to £10,500 (available only to companies with more than one employee or director on the payroll).
- The Lower Earnings Limit (LEL) is now £6,500 per year.
- The Dividend Allowance remains at £500.
- Income tax bands and personal allowances remain unchanged:
- Personal Allowance: £12,570
- Basic Rate: 20% on income up to £50,270
- Dividend Tax: 8.75% (basic), 33.75% (higher), 39.35% (additional)
Option 1: Low Salary (£5,000) + Dividends
Best for: Sole directors with no other employees, or if you have already contributed NIC for 35 years and qualify for state pension.
- Salary: £5,000/year
- No Income Tax or NICs: Below personal allowance and all NIC thresholds
- No Employer NICs: As it’s exactly at the Secondary Threshold
- No State Pension Credit: Earnings fall below the Lower Earnings Limit (£6,500)
Pros:
- No NIC costs for either the company or the individual
- No tax on salary
- Simple to administer
Cons:
- Doesn’t contribute towards your State Pension
- Misses out on some of the Corporation Tax savings you’d get from a higher salary
Option 2: Salary at the Lower Earnings Limit (£6,500) + Dividends
Best for: Directors who want to qualify for State Pension without incurring personal NICs
- Salary: £6,500/year
- No Income Tax or employee NICs
- Employer NICs: 15% on the amount over £5,000 = 15% of £1,500 = £225
- Qualifies for a year of State Pension entitlement
Pros:
- Builds entitlement to State Pension and other benefits
- Still avoids employee NICs
- Relatively low employer NIC cost
Cons:
- Employer NICs apply (unless Employment Allowance is available)
Option 3: Salary at Personal Allowance (£12,570) + Dividends
Best for: Directors with at least one other employee or director (eligible for Employment Allowance)
- Salary: £12,570/year
- No Income Tax: Covered by personal allowance
- Employee NICs: Start from £12,570, so none apply
- Employer NICs: 15% on the amount above £5,000 = £1,135.50
- If Employment Allowance is available, it offsets the employer NICs
Pros:
- Fully utilises personal allowance
- Builds up State Pension years
- Salary is a deductible business expense, reducing Corporation Tax
Cons:
- Employer NICs are due unless the company qualifies for Employment Allowance
- Not suitable for sole directors with no employees
Dividends: The Flexible Top-Up
After choosing your optimal salary, the remainder of your income can be taken as dividends, provided the company has sufficient post-tax profits.
Dividend tax in 2025/26:
- First £500 is tax-free (Dividend Allowance)
- 8.75% for income falling within the basic rate band
- 33.75% for income in the higher rate band
- 39.35% for additional rate income
Important: Dividends must be supported by board minutes and paid from retained profits after Corporation Tax.
Recommended Strategy for 2025/26
For sole directors with no employees:
- Salary: £6,500 – qualifies for State Pension without incurring employee NICs
- Employer NICs: £225 payable
- Top up with dividends as needed
For directors with other employees or director(s):
- Salary: £12,570 – utilises your full personal allowance and provides State Pension entitlement
- Employer NICs: Covered by Employment Allowance
- Dividends: To supplement remaining income
Example: Sole Director with £60,000 Profit
- Salary: £6,500
- Employer NICs: £225
- Corporation Tax: 19% on £53,275 = £10,122
- Post-tax profit: £43,153
- Dividends: £43,153 (first £500 tax-free, balance taxed at 8.75%)
- Dividend Tax: (£42,653 × 8.75%) = £3,729.64
- Total Personal Tax: £3,729.64
- Total Take-home: ~£45,923
Final Thoughts
The most tax-efficient way to pay yourself as a director depends on your company structure, cash flow needs, and long-term plans. With employer NICs applying from just £5,000 in 2025/26 and rates rising to 15%, reviewing your strategy has never been more important.
Contact AEL Markhams Limited if you have any questions