Key takeaways
- Directors' National Insurance is worked out on an annual earnings period, so the thresholds apply to total pay for the year, not each month.
- Most payroll software uses the alternative method during the year and corrects it in the final pay period.
- Dividends do not attract National Insurance, which is why many directors take a small salary and the rest as dividends.
- A company whose only employee paid above £5,000 is a director cannot claim the Employment Allowance.
- For a sole director without the Employment Allowance, a salary of £12,570 is usually most efficient in 2026/27 if the company has taxable profits; £5,000 to £6,708 suits companies with little or no profit.
Company directors are employees of their company for National Insurance, but special rules stop them avoiding NI by taking pay in uneven amounts. Understanding those rules, and how they interact with dividends and the Employment Allowance, is central to setting a director’s pay.
The annual earnings period
For ordinary employees, NI is worked out separately for each pay period. For directors it is worked out on an annual earnings period, normally the tax year, or the remaining part of the year if they become a director part-way through.
This means a director who takes a £30,000 bonus in March pays the same NI as one who takes £2,500 a month, because the thresholds apply to the year’s total:
| 2026/27 annual thresholds | Amount |
|---|---|
| Primary Threshold (director starts paying 8%) | £12,570 |
| Upper Earnings Limit (rate falls to 2%) | £50,270 |
| Secondary Threshold (company starts paying 15%) | £5,000 |
If someone becomes a director part-way through the year, the thresholds are pro-rated by the number of weeks remaining in the tax year.
The alternative method
Under the annual method, a director paid monthly would pay no NI until their cumulative pay passed £12,570, then a large amount in later months. To smooth this, payroll software can use the alternative arrangement: NI is deducted each month as for an ordinary employee, then recalculated on the annual basis in the director’s final pay period of the year (or when they stop being a director), with any difference adjusted.
Either way, the total for the year must equal the annual calculation. The director’s category letter and director status must be set correctly in payroll for this to work.
Salary, dividends and National Insurance
Dividends are not earnings for NI, so a director who is also a shareholder can reduce NI by taking a smaller salary and more in dividends. Dividends come out of profits after Corporation Tax and are taxed at dividend rates instead. See tax on dividends.
Choosing a salary for 2026/27
The common options for a director with no other employment income:
| Salary | Employee NI | Employer NI (no Employment Allowance) | Notes |
|---|---|---|---|
| £6,708 (Lower Earnings Limit) | £0 | £256.20 | Lowest salary that gives a qualifying year for State Pension |
| £5,000 (Secondary Threshold) | £0 | £0 | Below the LEL, so no State Pension qualifying year |
| £12,570 (Primary Threshold) | £0 | £1,135.50 | Uses the whole Personal Allowance; salary and employer NI are deductible for Corporation Tax |
For a sole director company that cannot claim the Employment Allowance:
- a salary of £12,570 usually works out better than £5,000 when the company has taxable profits. Raising the salary from £5,000 to £12,570 costs £1,135.50 in employer NI, but the extra £8,705.50 of salary and NI saves Corporation Tax of at least 19%, and the director receives the £7,570 tax-free within the Personal Allowance. Taking the same money as dividends instead would leave £7,051 at the 19% rate, or £6,529 at 25%
- a salary of £5,000 to £6,708 makes more sense if the company has little or no taxable profit, or the director’s Personal Allowance is already used by other income
- any salary of at least £6,708 secures a qualifying year for State Pension
If the company can claim the Employment Allowance, for example because it has another employee paid above £5,000, a salary of £12,570 is normally the efficient choice because the employer NI is covered by the allowance. Our director optimal salary calculator and salary vs dividends calculator model these options for 2026/27.
The Employment Allowance and directors
The Employment Allowance lets eligible employers reduce their employer NI by up to £10,500 a year. A company cannot claim it if the only employee paid above the Secondary Threshold is a director. Two directors both paid above £5,000 can qualify, as can a company with one director and another employee paid above that level. See the Employment Allowance guide.
Directors’ benefits and expenses
- Benefits in kind, such as a company car or private medical insurance, attract Class 1A at 15% for the company, not Class 1.
- Paying a director’s personal bills or reimbursing private expenses is treated as earnings and attracts Class 1 NI.
- Overdrawn director’s loan accounts can create a tax charge for the company and, if written off, NI on the amount written off. See close company rules.
Directors and State Pension
To get a qualifying year, a director needs earnings of at least the Lower Earnings Limit, £6,708 in 2026/27. Directors paying themselves only dividends build no State Pension record through the company and may need voluntary contributions.
Frequently asked questions
How is National Insurance calculated for company directors?
On an annual earnings period, so the thresholds apply to total earnings in the tax year rather than each pay period. Payroll can deduct it monthly and correct it at the year end.
Do directors pay National Insurance on dividends?
No. Dividends are not earnings for National Insurance.
What salary should a sole director take in 2026/27?
Usually £12,570 if the company has taxable profits, because the Corporation Tax relief on the salary and employer NI outweighs the 15% NI cost. A salary of £5,000 to £6,708 can suit companies with little profit. Check the numbers for your company.
Can a one-director company claim the Employment Allowance?
No, not if the director is the only employee paid above the £5,000 Secondary Threshold.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.