Why Directors Should Take a Small Salary, Even If They Don't Need To

A company director should take a small salary even when they do not need the income, because a salary set at the right level secures a qualifying year towards the UK state pension and reduces the company's corporation tax bill. This is one of the most overlooked parts of a sound director salary dividend strategy in the UK for 2026. Paying yourself entirely in dividends might feel simpler, but it can quietly cost you state pension entitlement and a valuable corporation tax deduction. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps owner-directors set their pay correctly every year. This article explains exactly why a small salary still makes sense, the two salary levels worth considering, and how the numbers work for the 2026/27 tax year.

Key Takeaways

• A director salary is a tax-deductible business expense, so it reduces the company's corporation tax bill while dividends do not.
• A salary of £6,708 in 2026/27 (the Lower Earnings Limit) protects a qualifying year for the state pension without triggering employee National Insurance.
• A salary of £12,570 uses the full personal allowance and maximises the corporation tax deduction, but may create a small employer National Insurance cost.
• The dividend allowance for 2026/27 is £500, after which dividends are taxed at 10.75% (basic), 35.75% (higher) and 39.35% (additional rate).
• 35 qualifying years are needed for the full new state pension, so missing a year by taking no salary can have a lasting cost.
• The optimal salary and dividend split for a limited company depends on whether you have other earnings and your employment allowance position.

Why is taking a salary better than taking only dividends?

A salary is better than dividends alone because a salary is deductible against company profits, whereas dividends are paid from profit after corporation tax. When your company pays you a salary, that amount lowers the taxable profit, so the company pays less corporation tax. Dividends offer no such deduction.

For 2026/27, corporation tax is charged at 19% on profits up to £50,000 and 25% above £250,000, with marginal relief between. A £12,570 salary therefore saves the company between £2,388 and £3,143 in corporation tax. That saving is why a director pay tax efficient approach almost always includes some salary rather than relying solely on dividends.

How does a small salary protect your state pension?

A small salary protects your state pension because earnings at or above the Lower Earnings Limit credit you with a qualifying year, even though no National Insurance is actually paid. For 2026/27 the Lower Earnings Limit is £6,708. A salary at this level or higher records a qualifying year on your National Insurance record at no cost to you personally.

The full new state pension requires 35 qualifying years, and at least 10 are needed to receive anything. If you pay yourself only in dividends, you earn no qualifying year, and repeatedly missing years can permanently reduce your pension. Buying back a missed year through voluntary Class 3 contributions costs over £900, so a free qualifying year through a modest salary is far better value.

£6,708 or £12,570: which salary level should a director choose?

The two salary levels most directors consider are £6,708 (the Lower Earnings Limit) and £12,570 (the personal allowance), and the right choice depends on the company's National Insurance position. Both are valid, and Blue Tick reviews each client's circumstances before recommending one.

A salary of £6,708 secures the state pension qualifying year with no income tax and no employee National Insurance, and costs the company £256.20 in employer National Insurance where the Employment Allowance is not available. A salary of £12,570 uses your full tax-free personal allowance and creates a larger corporation tax deduction, which is usually worth more than the small amount of employer National Insurance it may generate. Companies that can claim the Employment Allowance often pay no employer National Insurance at all, which tips the balance towards the higher figure. For a full overview of how salary and dividends fit together, see our guide to director salary and dividend strategy.

A worked example for 2026/27

Consider Priya, the sole director and shareholder of a profitable consultancy, who wants £60,000 from her company in 2026/27 and has no other income.

If Priya takes a salary of £12,570, it falls entirely within her personal allowance, so no income tax is due on it, and the company claims a corporation tax deduction on the full amount. She then draws the remaining £47,430 as dividends. The first £500 is covered by the dividend allowance, £37,200 falls in the basic-rate band at 10.75%, giving £3,999, and the remaining £9,730 falls in the higher-rate band at 35.75%, giving £3,478. Her dividend tax comes to £7,477.

Had Priya taken the entire £60,000 as dividends with no salary, she would have lost the corporation tax deduction on £12,570, paid more dividend tax because more of her income sits in higher bands, and earned no qualifying year towards her state pension. The small salary is the more efficient route on every measure.

A small salary also leaves more profit inside the company, which is where employer pension contributions become the most efficient route out.

Frequently Asked Questions

Do I have to take a salary as a company director?

No, a company director is not legally required to take a salary, and many directors choose dividends instead. However, taking a small salary set at least at the Lower Earnings Limit of £6,708 for 2026/27 is usually sensible because it protects a state pension qualifying year and provides a corporation tax deduction the company would otherwise lose.

What is the most tax-efficient director salary for 2026/27?

For most owner-directors the most tax-efficient salary in 2026/27 is either £6,708 (the Lower Earnings Limit, which secures a state pension year with no National Insurance) or £12,570 (the full personal allowance, which maximises the corporation tax deduction). The best choice depends on whether your company can claim the Employment Allowance and on any other income you receive.

Will a small salary trigger National Insurance?

A salary of £6,708 in 2026/27 triggers no income tax and no employee National Insurance, because the personal allowance and the primary threshold are both £12,570. It does create employer National Insurance of £256.20, because the secondary threshold is £5,000, unless the Employment Allowance covers it. A salary of £12,570 may create a modest employer National Insurance charge, but companies eligible for the Employment Allowance often pay none. Employee National Insurance only begins once your salary exceeds the Primary Threshold.

How many years do I need for a full state pension?

You need 35 qualifying years on your National Insurance record to receive the full new state pension, and a minimum of 10 qualifying years to receive any state pension at all. Each year a director takes a salary of at least the Lower Earnings Limit records a qualifying year, which is why a small salary matters even when the cash is not needed.

How Blue Tick Can Help

Blue Tick Accountants advises owner-directors across the UK on setting the right salary and dividend mix for their specific circumstances, including Employment Allowance eligibility, state pension protection and corporation tax planning. The optimal figure is rarely one-size-fits-all, and a short review each tax year can save you tax and protect your pension record. Head to our website and book a meeting now.

Conclusion

A small salary is one of the simplest and most valuable decisions an owner-director makes each year. Set at £6,708 it protects a state pension qualifying year for a company cost of £256.20 in employer National Insurance, and at £12,570 it also maximises your corporation tax deduction. Paying yourself in dividends alone may seem easier, but it forfeits both benefits. Review your salary level before the start of each tax year so your pay structure works as hard as your business does.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK plan their tax efficiently. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: The Dividend Allowance in 2026: How Much Can You Take Tax-Free?.

Related reading: Extracting Profits from Your Limited Company: A Director's Tax Toolkit.