Could a Higher Director Salary Actually Save Tax?
Many limited company owners are familiar with the usual approach of taking a relatively small salary and the rest as dividends.
That can work well.
But it is not always the most tax-efficient option.
For some profitable companies, paying directors a higher salary can actually leave more money overall between the directors and the company.
This can be particularly useful where the owners want to grow the business rather than withdraw every available pound personally.
Why would a higher salary help?
There are two important differences between salary and dividends.
A director's salary is normally an expense of the company and can therefore reduce the company's taxable profit.
A dividend cannot.
Dividends are paid from profits after Corporation Tax.
So where a company is paying Corporation Tax at a relatively high marginal rate, the Corporation Tax relief on an additional salary can become valuable.
For 2026, Corporation Tax is:
19% for companies within the small profits rate;
25% at the main rate; and
subject to Marginal Relief between £50,000 and £250,000 of profits.
For a company within the Marginal Relief band, an additional deductible expense can effectively save Corporation Tax at a marginal rate of 26.5% in straightforward cases. The £50,000 and £250,000 limits can be reduced where there are associated companies.
But what about National Insurance?
This is normally the obstacle.
For 2026/27, employer National Insurance is generally 15% on earnings above £5,000.
Employees and directors also generally pay employee National Insurance at 8% between £12,570 and £50,270.
However, eligible companies have an Employment Allowance of £10,500, which can reduce their employer National Insurance bill.
If the company has enough unused Employment Allowance to cover the employer National Insurance on the directors' salaries, this can change the calculation significantly.
When can a higher salary make sense?
Broadly, the strategy becomes worth considering where three things happen together:
1. The Employment Allowance covers the employer National Insurance on the additional salary.
2. The company is saving Corporation Tax at 25% or around 26.5% on the additional salary deduction.
3. The director remains within the basic-rate tax band after taking account of salary, dividends and any other personal income.
For 2026/27, the standard Personal Allowance is £12,570 and the higher-rate threshold for taxpayers in England, Wales and Northern Ireland is normally £50,270.
A simple £1,000 example
Suppose the company has an extra £1,000 of profit available to extract.
The director already receives a salary of £12,570, remains a basic-rate taxpayer, and the company's Employment Allowance means there is no additional employer National Insurance cost.
The company is also within the Corporation Tax Marginal Relief band.
Take the £1,000 as extra salary
The director would broadly pay:
20% Income Tax;
8% employee National Insurance.
That leaves approximately:
£720 personally.
Because salary is deductible, the company does not first need to pay Corporation Tax on that £1,000.
Take it as a dividend
If the £1,000 is company profit subject to a marginal Corporation Tax rate of 26.5%, approximately:
£735 remains after Corporation Tax.
Assuming the Dividend Allowance has already been used, dividend tax at 10.75% would be approximately £79.
That leaves the director with around:
£656 personally.
In this simplified example, salary leaves around £64 more from every £1,000 of company profit.
This is why automatically assuming dividends are always cheaper can give the wrong answer.
Why this strategy is particularly relevant to growing companies
There is an important distinction here.
A higher salary does not necessarily mean the director personally receives more cash after tax than they would under a traditional low-salary, higher-dividend strategy.
The benefit may instead appear in the company.
Because more salary reduces company profits before Corporation Tax, the company may retain more cash overall.
That can be attractive where the owners want money available to:
recruit employees;
invest in equipment;
increase marketing;
fund working capital;
build reserves;
open another location;
or otherwise grow the business.
The aim is therefore not necessarily:
“How do I maximise my personal bank account this year?”
It may instead be:
“How do we maximise the total amount left between us and the company?”
Those can produce different answers.
Example: two directors
Imagine a profitable company owned and run by two directors.
There are no other employees using the Employment Allowance and both directors want to keep their total personal income below £50,270.
Employer National Insurance on a £40,000 salary for one director is:
£40,000 − £5,000 = £35,000
£35,000 × 15% = £5,250
For two directors, this is:
£5,250 × 2 = £10,500
So the company's full £10,500 Employment Allowance could potentially cover the employer National Insurance on two salaries of £40,000, assuming the company satisfies the eligibility conditions.
Each director could then consider using dividends to bring their total income up to their desired level.
That does not mean £40,000 is automatically the correct salary. It simply demonstrates why the calculation can look very different where Employment Allowance is available.
What if the company has employees?
Employees may already be using some or all of the £10,500 Employment Allowance.
For example, if staff payroll has already generated £8,000 of employer National Insurance, only £2,500 of the allowance remains available.
That reduces how much additional director salary can be covered without an employer National Insurance cost.
So before increasing director salaries, you need to know:
How much Employment Allowance is actually left?
Not simply whether the company qualifies for it.
Single-director companies need particular care
There is also an important restriction.
A company with only one director cannot claim Employment Allowance where that director is the only employee liable for employer Class 1 National Insurance.
If another employee or director also earns above the Secondary Threshold, the position can change.
So this strategy will not work in the same way for every owner-managed company.
Other personal income matters too
The calculation should never be based only on what you take from your own company.
You also need to consider:
income from another job;
rental income;
pension income;
self-employed profits;
savings interest;
dividends from elsewhere;
benefits in kind.
If those have already used part of your basic-rate band, a larger company salary could push you into higher-rate tax.
That may completely change the result.
Why the company's Corporation Tax rate matters
This strategy tends to become more interesting where the salary deduction saves Corporation Tax at 25% or approximately 26.5%.
If the company is only paying the 19% small profits rate, the advantage can disappear.
For example, using the same £1,000 comparison:
At 19% Corporation Tax, £1,000 of profit leaves £810 after Corporation Tax.
After 10.75% basic-rate dividend tax, the shareholder keeps approximately £723.
That is slightly more than the roughly £720 from additional salary after 20% Income Tax and 8% employee National Insurance.
So the company's profit level genuinely matters.
Final thoughts
The traditional small salary plus dividends approach remains appropriate for many limited company owners.
But it should not be applied automatically.
For some profitable, growing companies, a higher director salary can produce a better overall result where:
Employment Allowance covers the employer National Insurance.
The company receives Corporation Tax relief at 25% or around 26.5%.
The director remains within the basic-rate band.
The interesting part is that the director may sometimes personally receive a little less, while the company keeps significantly more.
For business owners focused on reinvesting and growing their company, that can be the better outcome.
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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