Mind the Gap: How Low Director Salaries Could Affect Your State Pension
For years, many company directors have followed the same pattern: take a low salary, top it up with dividends, and enjoy a tax-efficient income while still securing qualifying years towards the State Pension. It worked because you could pitch your salary neatly between the Lower Earnings Limit (LEL) and the Secondary Threshold for employer’s NI. That way, you didn’t pay contributions, but HMRC still credited your record.
From April 2025, things aren’t quite so straightforward. The thresholds are shifting, and for some directors, the old strategy could now backfire.
The LEL for 2025/26 sits at £6,500 per year. That’s the magic figure you need to earn to get a qualifying year in your National Insurance record. Dividend income doesn’t count – only earnings that go through PAYE. So, if your director’s salary is below £6,500, you’ll get no credit at all. Unless you qualify for credits elsewhere (like child benefit or caring responsibilities), that’s a gap year in your State Pension record.
But here’s the catch: from April 2025, the employer’s NI threshold (Secondary Threshold) drops dramatically from £9,100 to just £5,000. And the rate of employer’s NI goes up to 15%. This means that the moment your salary goes above £5,000, your company will start paying employer’s NI. That “sweet spot” between the LEL and the employer threshold no longer exists. Directors who once managed to secure pension credits without triggering NI will now find themselves caught.
The government has tried to balance this by boosting the Employment Allowance, which will rise to £10,500, and by removing the £100,000 cap on eligibility. That’s helpful for small businesses with staff. But for one-man-band companies where the director is the only employee, the allowance isn’t available. In that case, you’re left with a real choice to make.
If you set your salary at around £6,500, you’ll secure your qualifying year, but the company will also face an employer’s NI charge. If you set it lower, you avoid that cost, but you risk a gap in your pension record. Go higher, say up to the personal allowance at £12,570, and you’ll still pay employer’s NI on everything above £5,000, plus income tax and employee’s NI once you cross the thresholds. There’s no way to escape the employer’s NI bite if you want to protect your State Pension.
So what’s the right answer? It depends. If your priority is long-term pension security, you’ll likely need to accept the employer’s NI cost as part of running the business. If immediate tax efficiency is more important, you might decide to stick with dividends and deal with gaps later, either through voluntary Class 3 contributions or by relying on other credits.
Here’s a simple comparison of the choices:
| Option | Salary level | Pros | Cons / Costs |
|---|---|---|---|
| Below £6,500 | No NI at all | No employer NI | Creates a pension gap unless credits apply |
| Around £6,500 | Qualifying NI year | Protects your State Pension record | Employer NI due at 15% on anything above £5,000 |
| £12,570 | Full personal allowance | Higher salary useful for pension contributions | Employer NI charge increases; may also pay employee NI/tax |
The bottom line? The rule change means directors can’t hide in the old safe zone anymore. Any salary that protects your State Pension now drags employer NI into the equation. If you’re a sole director, it’s time to weigh up the costs and decide whether you’d rather pay a bit more NI now, or risk plugging gaps later with voluntary contributions.