£6,500 vs £12,570 Director Salary: Which Should You Choose?
The two most common director salary levels are £6,500 (Lower Earnings Limit) and £12,570 (Personal Allowance). Each has distinct advantages depending on your circumstances.
£6,500 (LEL)
- ✓ Zero employee NI
- ✓ Zero employer NI
- ✓ Preserves state pension credits
- ✓ Maximum dividend extraction
£12,570 (Personal Allowance)
- ✓ Uses full tax-free allowance
- ✓ Higher pension contributions
- ✓ Better for mortgage applications
- ✓ May suit Employment Allowance users
The Financial Comparison
Let's break down the actual costs for the 2025/26 tax year:
| Factor | £6,500 | £12,570 |
|---|---|---|
| Gross Salary | £6,500 | £12,570 |
| Employee NI | £0 | £0 |
| Employer NI (no EA) | £225 | £1,136 |
| Income Tax | £0 | £0 |
| Total Cost to Company | £6,725 | £13,706 |
| Net in Your Pocket | £6,500 | £12,570 |
When to Choose £6,500
The £6,500 salary is typically optimal when:
- You're extracting most income as dividends – Keeping salary low maximises the amount available for tax-efficient dividend payments
- Your company doesn't qualify for Employment Allowance – Without EA, employer NI on higher salaries is a pure cost
- You have other PAYE income – If you've already used your Personal Allowance elsewhere, a higher salary would be taxed
- You want to preserve Corporation Tax deductions – Both salary amounts are fully deductible, but dividends come from post-tax profits
When to Choose £12,570
The higher salary may be better when:
- You claim Employment Allowance – The employer NI is offset, making the higher salary effectively "free"
- You need higher pensionable earnings – Personal pension contributions are capped at your relevant UK earnings
- You're applying for a mortgage – Lenders prefer to see consistent PAYE income over dividends
- You're building up state pension entitlement – Higher earnings mean higher NI credits (though £6,500 also qualifies)
The Dividend Perspective
Consider the full picture including dividend extraction:
With £6,500 salary: You have £6,070 more in the company to extract as dividends. At basic rate, dividends are taxed at 8.75%, costing ~£531 in tax on that £6,070.
Net difference: Taking £12,570 salary costs ~£911 more in employer NI but saves ~£531 in dividend tax. Without Employment Allowance, the £6,500 option wins by approximately £380.
The Answer
For most single-director companies without Employment Allowance, £6,500 is the optimal choice. It provides state pension qualification while minimising overall tax liability when combined with dividend extraction.
2025/26 Key Thresholds
| Threshold | Annual Amount | Relevance |
|---|---|---|
| Secondary Threshold (ST) | £5,000 | Employer NI starts |
| Lower Earnings Limit (LEL) | £6,500 | State pension qualification |
| Primary Threshold (PT) | £12,570 | Employee NI starts |
| Employer NI Rate | 15.0% | On earnings above ST |
Sources
Disclaimer: This guide is for informational purposes only and does not constitute financial or tax advice. Please consult a qualified accountant for advice specific to your circumstances.