As tax rules changed again from the 6th April, if you’re a director of a limited company in the UK, you’ve probably heard the magic number – £12,570.
It’s plastered across YouTube videos, social media posts, and accounting websites as the “optimal” salary to pay yourself.
But here’s the thing – this one-size-fits-all approach might be costing you money, or worse, setting you up for problems down the line.
Why Everyone Talks About £12,570 As The Best Way To Pay Yourself As A Director
The £12,570 figure represents the personal allowance – the amount you can earn before paying income tax. In theory, this creates a “sweet spot” where:
- Your company gets a tax deduction for paying the salary
- You pay zero income tax on the amount
- The overall tax efficiency appears optimal.
This advice originated from the contractor world, where highly-paid professionals (often earning six figures) needed a quick way to extract money from their limited companies. For a contractor earning £100,000+ annually, taking a small salary and the rest as dividends made perfect sense.
But here’s the problem: you’re probably not a contractor earning six figures.
The April 6th 2025 Game-Changer: Why £5,000 Is Now the New Magic Number
From April 6th, 2025, the employer’s National Insurance threshold dropped dramatically from £9,100 to just £5,000. This means:
- Any salary above £5,000 now triggers employer’s National Insurance at 15% (increased from 13.8%)
- Taking the “optimal” £12,570 salary now costs your company an extra £1,135 in employer’s NI
- The £5,000 salary avoids all employer NI, income tax, and employee NI.
Let’s run the numbers on a £50,000 profit scenario:
| OPTION 1: £12,570 SALARY + DIVIDENDS | OPTION 2: £5,000 SALARY + DIVIDENDS |
| Take-home: £39,440 | Take-home: £38,967 |
| Tax efficiency: 78.9% | Tax efficiency: 77.9% |
| Admin burden: Monthly PAYE obligations | Admin burden: Minimal |
| Employer’s NI cost: £1,135 | Employer’s NI cost: £0 |
The difference? Just £473 – but you eliminate monthly PAYE admin and save over £1,000 in employer’s National Insurance.
When the “Optimal” Salary Isn’t Optimal for You
Before you automatically choose either figure, consider these scenarios where the conventional wisdom falls apart:
1. You Have a Side Hustle
If you’re already earning a salary elsewhere, taking any director’s salary might push you into higher tax brackets.
You’re already using your personal allowance – why waste it on a tiny company salary?
2. You Have Multiple Companies
The £12,570 personal allowance applies to you as an individual, not per company.
If you’re a director of multiple businesses, you can only use it once.
3. You Need to Build Credit History
Banks and landlords prefer steady, predictable salaries.
That dividend-heavy approach might save tax, but it could cost you when applying for a mortgage or rental property.
4. You’re Planning for Retirement in the UK
Taking minimal salary means minimal National Insurance contributions.
If you’re not building up state pension entitlement elsewhere, you could be sacrificing future retirement income for short-term tax savings.
5. You’re Building a Business for Exit
If you’re not just extracting money but building a business for sale or investment, different strategies around reinvestment and growth might be more valuable than immediate tax efficiency.
The Hidden Costs of Chasing Tax Efficiency
State Pension Implications
To qualify for state pension contributions, you need to earn at least £6,500 (the Lower Earnings Limit). Taking a £5,000 salary saves employer’s NI but gives you no pension credit.
Taking £6,500 costs your company £225 in employer’s NI but secures a qualifying year.
Mortgage and Rental Applications
A £50,000 salary might cost you £4,000+ more in tax, but it shows consistent, predictable income that lenders love.
Sometimes the “inefficient” approach opens doors that dividend income can’t.
Future Flexibility
Low salary strategies work brilliantly until they don’t. Life changes – maybe you need to demonstrate higher income, or you want to make significant pension contributions.
Having locked yourself into a minimal salary structure can limit future options.
The Smart Approach: Consider Your Whole Picture
Instead of blindly following the crowd therefore, ask yourself these simple questions:
- What’s my total income situation? (Other jobs, rental income, partner’s income)
- What are my future plans? (Mortgage applications, retirement planning, business growth)
- How much admin am I willing to handle? (Monthly PAYE vs. simple dividend planning)
- What’s my risk tolerance? (Predictable salary vs. variable dividends).
A Better Framework for 2025
So here’s a practical approach for the 2025/2026 tax year:
For Pure Tax Efficiency (Most Contractors)
- £5,000 salary + dividends
- Minimal admin, maximum after-tax income
- Accept no state pension contributions.
For Long-term UK Residents
- £6,500 salary + dividends
- Qualifies for state pension
- Small employer NI cost (£225) for security.
For Income Security/Credit Building
- Higher salary based on your needs
- Accept lower tax efficiency for life flexibility
- Build consistent income history.
For Maximum Pension Building
- Higher salary + company pension contributions
- Can achieve 97%+ tax efficiency
- Builds long-term retirement wealth.
The Bottom Line
The best way to pay yourself as a director isn’t about finding the magical tax-efficient number that works for everyone.
It’s about finding the approach that works for your situation, your goals, and your future plans.
With the April 6th changes making employer National Insurance more expensive, the old £12,570 advice needs updating.
For many directors, £5,000 might be the new sweet spot. But for others, a completely different approach might be better.
Don’t let social media soundbites make crucial financial decisions for you.
Take 10 minutes to consider your full situation, run the numbers for different scenarios, and make an informed choice that supports both your immediate needs and long-term goals.
The tax system is just one piece of the puzzle – make sure you’re solving the right problem.
This article is based on the tax rates and thresholds for 2025/26.
Before You Go …
“Can I do my own payroll?” and “Can you do payroll without an accountant?” are questions many UK business owners ask.
The short answer is yes—but the real question isn’t whether you can—it’s whether you should.
So check out our next post where we walk you through what’s involved , when it’s safe to DIY, and when outsourcing is the smarter move for your business.
Why “Can I Do My Own Payroll” Is the Wrong Question to Ask
Remember the information and products on this website do NOT constitute tax or financial advice. So if in doubt always seek professional advice from a qualified accountant or tax advisor.
