The 2026/27 thresholds in plain English
| Threshold | Amount (2026/27) | What it means |
|---|---|---|
| Personal Allowance | £12,570 | Income up to this is income-tax-free. |
| Primary NI threshold | £12,570 | Employee NI starts here (employee pays 8% from this point). |
| Secondary NI threshold | £5,000 | Employer NI starts here (company pays 15% from this point on the director's salary). |
| Employment Allowance | £10,500/yr | If you qualify (typically: more than one employee), the first £10,500 of employer NI is rebated. |
| Dividend Allowance | £500 | First £500 of dividend income is tax-free. |
| Basic-rate band | up to £50,270 | Dividend tax in this band is 10.75%. |
Why £12,570 wins for a single director
At £12,570 you use your full personal allowance, so the salary is income-tax-free. You pay employer NI on the £7,570 above the £5,000 secondary threshold (15% = £1,135.50) — but that NI is itself deductible from Corporation Tax, and the salary saves Corporation Tax at 19-25% (19% for profits under £50k, marginal up to 26.5% for £50-£250k, 25% above).
The maths: at the small-profits 19% CT rate, drawing the next £7,570 as salary (vs as dividend) costs £1,135.50 in employer NI but saves roughly £1,439 in Corporation Tax — net £303 saving. At the 25% main rate it's a bigger saving. So £12,570 beats £5,000 even though it triggers employer NI.
When to deviate from £12,570
- You have other PAYE income (e.g. you're employed elsewhere) — your personal allowance is already used. Drop the director's salary back to the secondary NI threshold (£5,000) or skip it entirely.
- You qualify for Employment Allowance (e.g. multiple directors/employees) — you can go higher (~£20k) before the NI bites, and many small Ltds do.
- You have a Scottish tax residence — Scottish income tax bands differ. The numbers above are England, Wales, NI.
- You're a director-only Ltd with profits below the personal allowance anyway — paying yourself £12,570 may leave the company in a loss position, which has its own complications.
How the practice health check applies this rule
When you connect FreeAgent, we look at the director count from /v2/users and your latest payroll period. The current MVP issues a generic 'optimum salary applies' watch finding for single-director companies, with the £12,570 number called out. Once we read payroll directly (in build), we'll compare your actual monthly PAYE against £1,047.50 (= £12,570/12) and flag the gap.