The annual earnings period
NI for directors is assessed on the tax year as a whole. Using the standard method, no employee NI is deducted until cumulative pay for the year passes £12,570, after which 8% applies up to £50,270 of cumulative pay and 2% beyond, with employer NI at 15% once cumulative pay passes £5,000. The alternative method applies normal monthly calculations during the year with a mandatory annual true up in the final period, smoothing cash flow for directors on regular salaries. Both arrive at the same total by year end.
Choosing the 2026/27 salary
The classic strategy pays a salary at £12,570, using the full personal allowance and NI primary threshold, then tops up income with dividends. At that salary the employer NI cost is 15% of £7,570, about £1,136, which the £10,500 Employment Allowance wipes out entirely for companies entitled to claim it. The salary and the employer NI are both corporation tax deductible, and the year banks a full State Pension credit. Salaries above £12,570 start costing 8% employee NI and are rarely efficient before dividends are exhausted.
The sole director problem
A company whose only employee paid above £5,000 is its sole director cannot claim the Employment Allowance. The choice becomes £12,570 with roughly £1,136 of employer NI, still usually worthwhile because the corporation tax saving on the extra salary outweighs it at most profit levels, or a safer £5,000 salary with no NI at all but a wasted slice of personal allowance. Add a second genuine employee, even part time above the threshold, and allowance eligibility returns. Our Employment Allowance guide covers the eligibility traps.
Dividends and the bigger picture
Dividends do not go through payroll, they are declared from post tax profits with minutes and vouchers, and taxed at 8.75%, 33.75% or 39.35% after the £500 allowance. The salary plus dividend blend, pension contributions made by the company, and timing around the corporation tax marginal rate between £50,000 and £250,000 of profit all interact, which is why the right answer is personal. Our guide to how directors pay themselves works the full comparison.
Compliance details directors miss
Directors' loans that drift overdrawn trigger s455 tax and possible benefit in kind reporting. Benefits like private medical need P11Ds now and payrolling from 2027, see our payrolling guide. A director appointed mid year gets a pro rated annual NI threshold based on weeks remaining in the tax year. And the FPS must still be filed on or before each payday even for a 1 person company, with the same penalties for lateness.
Set it once, review it yearly
Directors' payroll is low effort once configured correctly: 12 identical pay runs and an annual review each April when thresholds move. The review matters, because a frozen personal allowance and shifting NI rates change the optimal answer. We run directors' payroll inside our fixed fee payroll service and pair it with a salary and dividend plan at each year end.
Frequently asked questions
Why is National Insurance different for directors?
Directors have an annual earnings period, so NI is calculated on cumulative pay for the whole year against annual thresholds rather than each payday in isolation. This stops directors avoiding NI by taking pay in irregular lumps.
What is the most tax efficient director salary for 2026/27?
For most companies with 2 or more employees or directors on payroll, £12,570 matching the personal allowance and NI primary threshold works well, with the Employment Allowance covering the employer NI. A sole director company cannot claim the allowance, so the answer depends on comparing employer NI cost against corporation tax relief; many still choose £12,570.
Does a director need a PAYE scheme for a small salary?
Yes, if the salary exceeds £5,000 a year (the 2026/27 secondary threshold), or if the director has another job or receives benefits. Below all thresholds with no benefits, no scheme is needed but the year counts less favourably for State Pension credit.