Key facts
- A sole director taking any salary must register for and operate PAYE.
- Most single directors take a salary at or near the NI Primary Threshold (£12,570/year for 2026/27) to preserve NI qualifying years without paying NI.
- Additional income is typically taken as dividends, which do not go through PAYE.
- NI for directors is normally calculated using the annual earnings period method.
- RTI submissions must still be made — even for a single monthly payment.
Why Single Directors Need PAYE
If you have formed a limited company and take any salary — even a small one — you are legally required to register as an employer and operate PAYE. Your company is the employer and you, as director, are the employee. This applies even if you are the only person involved.[1]
The only situation where you do not need PAYE is if you take no salary at all and are paid entirely through dividends.
The Typical Salary + Dividends Setup
Most single-director companies use a combination of salary and dividends to extract profits tax-efficiently:
| Component | Amount (2026/27) | Tax Treatment |
|---|---|---|
| Salary | £12,570/year (£1,047.50/month) | Corporation Tax deductible; no employee NI at this level; employer NI of £1,135.50/year |
| Dividends | Variable (from post-tax profits) | No NI; £500 dividend allowance; taxed at 10.75% / 35.75% / 39.35% |
Why £12,570? This is the NI Primary Threshold for 2026/27. Earnings at this level:
- Are covered by the Income Tax Personal Allowance — so no Income Tax
- Are at the Primary Threshold — so no employee NI
- Qualify for a NI qualifying year (above the Lower Earnings Limit)
- Are fully deductible for Corporation Tax
NI Calculation for Directors
Directors’ NI is calculated differently from regular employees. By default, the annual earnings period method is used, which means NI is calculated on total annual earnings rather than on each pay period individually:[2]
| Threshold (Annual) | Employee NI Rate | Employer NI Rate |
|---|---|---|
| Up to £5,000 (Secondary Threshold) | — | 0% |
| £5,001 to £12,570 (Primary Threshold) | 0% | 15% |
| £12,571 to £50,270 (UEL) | 8% | 15% |
| Above £50,270 | 2% | 15% |
For a director taking £12,570:
- Employee NI: £0 (earnings at the Primary Threshold)
- Employer NI: 15% × (£12,570 − £5,000) = £1,135.50
Tip: The £1,135.50 employer NI is itself a tax-deductible expense for the company, so the net cost is lower. If your company qualifies for the Employment Allowance (£10,500), the employer NI may be reduced to zero — but single-director companies with no other employees are generally not eligible for the Employment Allowance.
Setting Up Payroll
To run PAYE as a single director:[3]
- Register as an employer with HMRC online
- Install payroll software — HMRC’s free Basic PAYE Tools is suitable for a single director
- Enter your details as an employee, including your NI number and tax code
- Set the NI calculation method to “Director” (annual earnings period)
- Process a pay run each month (or on your chosen frequency)
- Submit the FPS to HMRC on or before payday
- Pay HMRC the PAYE liability by the 22nd of the following month
The Monthly Process
For a director paying £1,047.50 per month:
- Process the pay run in your software on your chosen payday
- The software calculates Income Tax (£0 with code 1257L) and NI (£0 employee, variable employer NI)
- Generate and save the payslip
- Submit the FPS to HMRC
- Transfer £1,047.50 from the company bank account to your personal account
- Pay the employer NI to HMRC (can be offset against Employment Allowance if eligible)
Year-End for Single Directors
At the end of the tax year (5 April), you must:
- Submit your final FPS by 19 April, flagged as the last submission
- Issue yourself a P60 by 31 May
- Report any benefits in kind on a P11D by 6 July (if applicable)
- Update your payroll software for the new tax year
Frequently Asked Questions
What salary should I pay myself as a sole director?
Many accountants recommend a salary of £12,570 per year (£1,047.50/month) for 2026/27. This is the NI Primary Threshold, so you build a qualifying year for the State Pension without paying employee NI. However, your employer (the company) will pay 15% employer NI on earnings above £5,000, which is £1,135.50 per year. Some directors set salary at £5,000 to avoid any NI, but this may not be a qualifying year.
Do I need payroll software for one person?
Yes. You need payroll software to calculate deductions, generate payslips, and submit FPS returns to HMRC. HMRC’s free Basic PAYE Tools works well for single-director companies. Alternatively, commercial software or your accountant can handle it.
How often do I need to run payroll?
Most single directors run payroll monthly. You submit an FPS on or before each payday. If you pay yourself the same amount each month, the process is straightforward — you simply repeat the same pay run 12 times a year.
What about dividends — do they go through PAYE?
No. Dividends are paid from company profits after Corporation Tax and do not go through PAYE. They are not subject to NI contributions. However, you must declare dividends on your Self Assessment tax return if they exceed the £500 dividend allowance (2026/27).
Further Reading
- Registering as an Employer — how to register your company for PAYE
- How Tax Codes Work — understanding the 1257L code on your payslip
- NI for Directors — detailed guide to the annual earnings method
- Payroll Year-End Checklist — closing the year correctly
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Sources
- Running payroll — GOV.UK
- National Insurance for company directors — GOV.UK
- PAYE and payroll for employers — GOV.UK
- Tax on dividends — GOV.UK