Maximising Tax Efficiency While Securing Your State Pension (2025/26)

Securing Your State Pension: How Much Salary Should a Company Director Pay Themselves?

Running a personal or family-owned company gives directors flexibility in how they take money out of the business. One of the most common strategies is to pay a modest salary and withdraw additional profits as dividends—keeping things both tax-efficient and financially beneficial.

But beyond tax savings, paying yourself a salary has another important advantage: it helps you build qualifying years for your state pension and certain state benefits.

Why Qualifying Years Matter

To receive the full state pension, you need 35 qualifying years on your National Insurance record. To receive even a partial pension, you must have at least 10 qualifying years.

So, if you’re not yet at 35 years, making sure each tax year counts is crucial—and that starts with paying yourself a sufficient salary.

What Counts as a Qualifying Year?

A year becomes “qualifying” when your earnings are subject to National Insurance contributions (NICs) and meet a minimum threshold.

• For the 2025/26 tax year, the lower earnings limit is £125 per week, or £6,500 for the year.

• Salary and bonuses count towards this threshold, while dividends don’t, since they’re not liable to NICs.

That means you’ll need to pay yourself at least £6,500 in salary or bonuses to secure a qualifying year.

National Insurance Contributions: The Key Thresholds

For 2025/26:

• Lower Earnings Limit (LEL): £6,500 a year.

• Primary Threshold: £12,570 (aligned with the personal allowance).

• Secondary Threshold: £5,000.

Here’s what this means in practice:

• If you earn between the LEL (£6,500) and the Primary Threshold (£12,570), you’ll get a qualifying year without actually paying employee NICs—thanks to the “notional zero rate.”

• However, employers do pay contributions once earnings exceed the secondary threshold of £5,000, unless they can claim the employment allowance.

The Employer’s NIC Challenge

If you’re the only employee and also a director, your company cannot claim the employment allowance.

That means if you pay yourself the minimum salary of £6,500, your company will also face an employer’s NIC bill of £225 (15% of £6,500 – £5,000).

On the other hand, if you’re running a family company where the employment allowance is available, you can pay a salary that qualifies without worrying about employer NICs.

Should You Pay More Than the Minimum Salary?

While £6,500 is enough to secure a qualifying year, it may not always be the most tax-efficient strategy.

If your full personal allowance of £12,570 is available, paying yourself a salary up to that level is often better. The reason?

• Your company benefits from a corporation tax deduction on the salary and NICs.

• This deduction usually outweighs the cost of employer NICs.

In short, a higher salary (within your personal allowance) can sometimes save more tax overall.

Key Takeaway

If you’re a company director, paying yourself the right salary isn’t just about tax efficiency—it’s about securing your future state pension. For 2025/26, the magic number for a qualifying year is £6,500, but for many, paying up to £12,570 may be the smarter, more tax-efficient choice.

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