Close video


Setting your salary level is completely up-to you as a director. You have three main options to choose from:

1. The tax and Employee NIC free allowance
2. The National Living Wage (NLW)
3. A commercial salary rate

Each has different implications explained below.

1. The tax and Employee NIC free allowance

The tax and Employee NIC free allowance, currently set at £12,570 would mean you pay no income tax or employee national insurance. This is obviously very tax efficient, but if you make large personal pension contributions you would not be able to do this.

2. The National Living Wage

The NLW is set at £9.50 per hour, so based on a typical 37.5 hour week, this would equate to an annual salary of £18,525. Paying an extra £5,955 as salary above the tax & Employee NIC free allowance would mean that you will pay income tax of £1,191, employees NIC of £789, and employer's NIC of £1,418 makes an extra £3,398 payable to HMRC.

By paying a salary set at the NLW you would receive Corporation tax relief of £1,131, as salary is a business expense, the net extra taxes payable would be £2,267 (£1,191+£789+£1,418-£1,131).

HMRC have stated that although the NLW applies to all employees, they will not seek to enforce it against directors of companies.

3. A commercial salary rate

The third option would be to pay yourself a commercial salary - i.e. the rate you would get for doing the job you do if you were working for someone else. Depending on the salary level this would result in a higher tax and NIC liability.

The 123 Way

As a member of The 123 Way, you can choose which ever level of salary you wish. There are obvious tax saving advantages to some but you must also consider the level of pension contributions that you may wish to make and if you are applying for a high-street mortgage, this may be an issue. In conjunction with our 123 Extra partners we can advise you of the best salary level to choose depending on your individual situation and then help you secure a contractor specialist mortgage or set up a suitable pension plan.

Salary in Practice

When you have decided on the level of salary you wish to pay yourself, we will prepare your payroll for you each month and send you a payslip. This will show you how much to transfer from your company bank account to your personal account and how much income tax and NIC to put into your business savings account to pay your PAYE & NIC liability which is usually liable each quarter.

You will need to enter this in your bookkeeping each month, which is very easy to do.


This information is for general information only. We take no responsibility for any action taken or refrained from in consequence of its contents. Always seek our professional advice specific to your circumstances before acting.