Understand how PAYE and NIC tax bands work for the 2026/27 tax year.
Key Terms and Rates
PAYE (Pay As You Earn): This is Income Tax paid on your salary, it is the main tax employees pay in the UK. PAYE is automatically calculated and reported by your employer, being your limited company, via payroll. For 2026/27, the standard Personal Allowance remains £12,570, with the basic rate band remaining £37,700 for England, Wales and Northern Ireland.
NIC (National Insurance Contributions): Although NIC and PAYE are calculated differently, NIC is often viewed as another form of tax on earnings. Employee’s NIC is deducted from pay, while Employer’s NIC is an additional cost to the company. It contributes towards certain state benefits, including the State Pension. For 2026/27, the main employee NIC rate remains 8% between the Primary Threshold and Upper Earnings Limit, and 2% above that. Employer NIC remains 15% above the Secondary Threshold.
Salary: Receiving a salary through your company is generally a tax-deductible expense for the business, reducing its Corporation Tax liability.
Dividends: The other main way directors extract funds from their company is through dividends, which are paid out of post-tax profits.
Typical Full-Time Employee PAYE & NI Rates (2026/27)
| Earnings Band | PAYE Rate | Employee’s NI Rate | Employer’s NI Rate |
|---|---|---|---|
| £0 to £12,570 | 0% | 0% | 0% (up to £5,000**) |
| £12,571 to £50,270 | 20% | 8% | 15% (above £5,000**) |
| £50,271 to £125,140 | 40% | 2% | 15% |
| Over £125,140 | 45% | 2% | 15% |
PAYE and NIC thresholds apply to income above the Personal Allowance. The Employer’s NIC only applies to earnings above the £5,000 secondary threshold.
Employers NI
The table above shows Employee’s (Primary) Class 1 NIC deducted from pay. There is also an Employer’s (Secondary) Class 1 NIC charge payable by the company on salaries above the relevant threshold, which is £5,000, taxed at 15% for 2026/27. The Lower Earnings Limit has increased to £6,708 for 2026/27, while the Primary Threshold remains £12,570.
Example (General Employee): For an employee earning £30,000 per year:
Annual gross salary: £30,000.00
Employer’s NIC: (£30,000 – £5,000) × 15% = £3,750
Total cost to employer: £33,750.00
Registration for PAYE and NIC
To receive a salary, your company needs a PAYE scheme registered with HMRC. We handle this registration for you as standard.
Choosing Your Director’s Salary for 2026/27
Taking a salary is a tax-deductible expense for your company. The optimal salary balances tax efficiency, considering Income Tax, NIC and Corporation Tax, with administrative simplicity and State Pension contributions. Based on 2026/27 rules, here are the main options.
Recommended Salary: £12,570 per year (£1,047.50 per month)
Why: This level uses your full tax-free Personal Allowance of £12,570. While it triggers Employer’s NIC for single-director companies, the Corporation Tax saving on the salary generally makes it the most tax-efficient overall strategy for extracting this amount. The monthly PAYE threshold and Primary Threshold are both £1,048, which aligns with this annual salary recommendation in practice.
Single Director Companies:
Employer’s NIC payable by the company: £1,135.50 for the year.
No Employee’s NIC or PAYE is due on this salary.
Requires quarterly payments of the Employer’s NIC, and we will advise you.
Companies with 2+ Directors/Employees:
The Employment Allowance, up to £10,500, typically covers the Employer’s NIC liability on salaries at this level for eligible companies.
Result: Usually £0 Employer’s NIC to pay.
State Pension: This salary is above the Lower Earnings Limit, so it counts as a qualifying year for the State Pension. For 2026/27, the LEL is £6,708 per year.
Alternative Salary (Admin Simple): £4,992 per year (£416 per month)
Why: This salary is below the thresholds for both Employee’s and Employer’s NIC, meaning no NIC payments or associated administration are required. Because the monthly Secondary Threshold is £417, a monthly salary of £416 remains below the employer NIC trigger.
Considerations:
It is usually less tax-efficient if you plan to draw further funds, such as dividends, compared to the £12,570 salary.
Crucially, this salary is below the Lower Earnings Limit of £6,708 for 2026/27. Therefore, this does not count as a qualifying year towards your State Pension.
Monthly RTI Returns
Regardless of the salary chosen, your company must file a Real Time Information, or RTI, return with HMRC each month payroll is run, even if the tax and NIC due is £0. As part of our service, we prepare and file these returns for you. HMRC’s employer guidance for 2026/27 continues to require payroll reporting through PAYE.
Paying PAYE and NIC
(1) If you choose the £12,570 salary as a single director, Employer’s NIC of £1,135.50 will be due for the year. We will calculate this and advise you quarterly on the amounts and deadlines, typically 22 July, 22 October, 22 January and 22 April.
(2) If you choose the £4,992 salary, no PAYE or NIC payments will be due.
(3) If you are a multi-director or employee company eligible for the Employment Allowance and choose the £12,570 salary, typically no Employer’s NIC payments will be due as the allowance covers the liability.
(4) If you choose a salary different from these options, we will calculate any PAYE or NIC due and advise you accordingly.
Eligibility for the State Pension
We are often asked if a director’s salary counts towards the State Pension.
To count as a qualifying year, your earnings must be at or above the Lower Earnings Limit for National Insurance, which is £6,708 in 2026/27.
The recommended salary of £12,570 per year does meet this requirement.
The alternative salary of £4,992 per year does not meet this requirement.
Most people need 35 qualifying years for the full new State Pension, or 30 years for the old basic State Pension depending on age. You do not need to actually pay NIC contributions for a year to qualify, you just need earnings above the LEL.