If you run a limited company and pay yourself through it, your payroll works differently from a standard employee’s. Directors’ National Insurance is calculated on an annual basis rather than per pay period, the salary you set yourself affects your company’s Corporation Tax bill, and the split between salary and dividends determines how much tax you and the company pay between you. Getting this structure right is one of the most important financial decisions a director makes each year, and a key reason many directors choose outsourced payroll is having someone who sets it up correctly from the start.
This guide covers the payroll mechanics for company directors in 2026/27, including the NIC calculation method, the most common salary strategies, and how the April 2026 dividend tax changes affect the salary versus dividends decision.
How directors’ NIC works: the annual earnings period
For most employees, National Insurance is calculated on a per pay period basis. Each month (or week), the payroll software checks whether earnings exceed the relevant threshold and calculates NIC accordingly. Directors are different.
Directors’ NIC is calculated using an annual earnings period. This means the annual thresholds are used for the full year calculation, regardless of how frequently the director is paid. It prevents a situation where a director taking a large one off payment in a single month would pay more NIC than if the same total had been spread across 12 months.
In practice, most payroll software gives you two options for directors: the annual earnings period method (sometimes called the alternative method) or the standard method, where NIC is calculated on a pay period basis and then reconciled to the annual figure at year end. Both methods should produce the same result by the end of the tax year. The annual earnings period method is simpler and avoids the year end reconciliation, which is why most bureaus and accountants prefer it.
The three common salary strategies for 2026/27
Most director shareholders of small limited companies take a low salary and supplement it with dividends. The question is where to set the salary. For 2026/27, three thresholds matter.
Strategy 1: Salary of £5,000 (secondary threshold). Setting the salary at exactly £5,000 means no employer NIC is payable at all. The director doesn’t pay employee NIC either (the primary threshold is £12,570). The salary is below the Lower Earnings Limit of £6,708, so this year will not count as a qualifying year for the State Pension. The company gets a Corporation Tax deduction on the £5,000 salary. This strategy works for directors who don’t need State Pension qualifying years (perhaps because they have a sufficient record already or a private pension) and want to minimise all NIC.
Strategy 2: Salary of £6,708 (Lower Earnings Limit). This is the minimum salary needed to secure a qualifying year for the State Pension without triggering any NIC payments. At £6,708, the salary is above the Lower Earnings Limit (£129 per week for 2026/27) but below the primary threshold (£12,570). No employee NIC is due. Employer NIC is payable on £1,708 (£6,708 minus £5,000 threshold) at 15%, which comes to £256.20 per year. For directors who can’t claim Employment Allowance (most single director companies can’t), this is the cost of a State Pension qualifying year. Combined with a modest bureau fee (see our payroll pricing), it’s still a fraction of what an accountant would charge to manage the same thing.
Strategy 3: Salary of £12,570 (personal allowance). This uses the full personal allowance so no income tax is payable on the salary. Employee NIC doesn’t kick in until earnings exceed the primary threshold (also £12,570 for 2026/27), so effectively there’s no employee NIC either. Employer NIC on £12,570 is £1,135.50 (£7,570 above the £5,000 threshold at 15%). The company gets a Corporation Tax deduction on the full salary. For companies that can claim Employment Allowance (those with at least one other employee paid above £5,000), the employer NIC is fully offset. This is the most tax efficient option when Employment Allowance is available.
What changed with dividends in April 2026
The Autumn Budget 2025 increased dividend tax rates from 6 April 2026. The basic rate rose from 8.75% to 10.75%. The higher rate rose from 33.75% to 35.75%. The additional rate stayed at 39.35%. The dividend allowance remains at £500.
For a director taking £40,000 of dividends (after a £12,570 salary), the annual dividend tax bill has increased by approximately £600 compared to the previous year. That’s not a dramatic increase in isolation, but combined with the frozen personal allowance, frozen basic rate band, and the cumulative reduction of the dividend allowance from £5,000 to £500 over recent years, the gap between dividend taxation and employment taxation continues to narrow.
The salary versus dividends calculation still favours dividends for most director shareholders. But the margin is smaller than it was, and directors extracting higher amounts should review their structure annually rather than assuming last year’s approach still delivers the best outcome.
Single director companies and Employment Allowance
This trips up a lot of people. If your company’s only employee paid above the £5,000 secondary threshold is also a director, the company cannot claim Employment Allowance. This means the employer NIC on the director’s salary is a real cost with no offset. For a £12,570 salary, that’s £1,135.50 per year. Many single director companies choose the £5,000 or £6,708 salary level specifically to minimise this cost. If you take on even one additional employee (paid above £5,000) who isn’t a director, the exclusion falls away and the company can claim the full £10,500 Employment Allowance. A bureau that handles payroll for directors will advise on which strategy makes sense for your situation.
Directors and auto enrolment
Directors who are the sole employee of their company are not automatically enrolled into a workplace pension. However, directors can choose to opt in, and if the company has other employees who are eligible jobholders, the auto enrolment duties apply to those employees regardless of the director’s position. For more on how this works, see our guide to auto enrolment for directors.
Payroll reporting for directors
Directors’ pay must be reported through RTI in the same way as any other employee. The FPS must be submitted on or before each payment date, showing the year to date figures. If the director is paid annually (a single payment in one month), the FPS is submitted once. If monthly, twelve times. The EPS is used for Employment Allowance claims and statutory payment recoveries as normal.
P60s must be issued to directors by 31 May following the end of the tax year, showing total pay, tax, and NIC for the year. If the director leaves the company during the year, a P45 is issued. The payroll mechanics are identical to any other employee; it’s the NIC calculation and the strategic salary planning that make directors’ payroll distinct. If you’d like help setting up the right structure for your company, get in touch and we’ll walk you through the options.
Salary and dividend planning is tax-sensitive and depends on your wider circumstances. Ask your accountant or tax adviser to confirm the right extraction strategy; a payroll bureau can then administer the agreed salary accurately.
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