There are many situations where £12,570 is not the most efficient salary - and in some cases, a higher or lower figure may be more beneficial. This is especially relevant following the announcement in the budget that the rate of tax payable on dividends will increase by two percentage points for basic and higher rate tax payers in April 2026.
Below are some common scenarios where the usual £12,570 recommendation may not be the best strategy.
Corporation Tax Losses
If your company has brought forward taxable losses, paying yourself £12,570 may not reduce the company’s corporation tax bill, simply because there isn’t one to reduce.
Directors’ remuneration is normally an allowable expense, saving 19–25% corporation tax. However, if the company is loss-making, this saving is not immediately realised. In these cases, the salary may trigger unnecessary personal tax liabilities with no corresponding benefit to the company.
Research and Development
Companies undertaking qualifying research and development (R&D) activities may need to consider how directors’ salaries interact with R&D claims. Certain staffing costs may enhance an R&D tax relief claim which can be a good reason to consider a higher level of remuneration.
Other Personal Income
If you already receive income elsewhere such as rental income, employment income, pensions, or dividends, the £12,570 salary may push you into the higher (or additional) rate tax bands and potentially outweigh the corporation tax saving achieved.
State Pension Considerations
Understandably, directors are often mindful of ensuring they are earning ‘qualifying years’ for their State Pension. However, it is worth noting that for 2025/26, a salary of just £6,500 (the Lower Earnings Limit) is sufficient to secure a qualifying year. As a result, £6,500 can be a worthy contender for optimum salary for a loss-making company.
Furthermore, once you have achieved 35 qualifying years, you are entitled to the full State Pension under current rules. In these cases, a salary of even less than £6,500 can be worth considering depending on the circumstances.
Practical Considerations (Company and Personal)
The ‘optimum’ number in tax terms isn’t always ideal in practical terms.
Higher salaries generally require PAYE to be physically paid sooner than tax due via Self-Assessment, which can be a drain on cashflow.
Salaries can impact mortgage applications, where lenders sometimes prefer PAYE income rather than dividends. Some directors choose a slightly higher salary to demonstrate stable employment income for mortgage applications, even if it is marginally less tax efficient.
Dividends can only be paid from available reserves, whereas salaries can be paid even in loss-making years.
There may be a credit directors’ loan account balance that can be drawn from tax free without the need for either salary or dividends.
Employment Allowance
Another consideration is whether the company can claim the Employment Allowance. If the allowance is available, it can reduce or remove the Employer’s National Insurance cost on directors’ salaries, lowering the tax burden for the company. As a result, it is sensible to factor this in when deciding the most efficient salary and dividend mix each year.
Marginal 26.5% Corporation Tax Rate
For companies with profits falling into the marginal corporation tax band (broadly speaking £50,000 - £250,000), the effective tax rate on part of those profits is 26.5%. In these cases, the corporation tax relief on directors’ remuneration is more valuable than in situations where companies pay tax at entirely 19% or 25%. This can raise a strong case for a salary in excess of £12,570.
Conclusion
The traditional £12,570 salary remains a good starting point for many directors, but it certainly isn’t universal. The right mix depends on:
The company’s profit and loss position.
R&D activities.
Your personal income.
Your state pension record.
Your future plans, such as borrowing or retirement.
Availability of the Employment Allowance.
Directors’ loan account position.
Marginal corporation tax rate.
Ultimately, a tailored calculation usually gives the best answer.
If you’d like personalised advice, or would like us to review your current remuneration strategy, please get in touch.