There are various ways in which profits can be extracted from a personal or family company. A popular and tax-efficient extraction strategy is to pay a small salary and to extract further profits as dividends as long as the company has sufficient retained profits.

One of the advantages of paying a salary is to secure a qualifying year for state pension and benefit purposes. A person needs 35 qualifying years when they reach state pension age to receive a full state pension and at least ten qualifying years to receive a reduced state pension. If the director does not yet have 35 qualifying years, it is worth paying a salary which is sufficient for the year to be a qualifying year.

A year will be a qualifying year if an individual has qualifying earnings subject to National Insurance that are at least 52 times the lower earnings limit. Payments of salary and bonus are liable to Class 1 National Insurance. By contrast, dividends do not attract National Insurance.

For 2025/26, the lower earnings limit is set at £125 per week. Thus, it is necessary to pay a salary or bonus of at least £6,500 (52 x £125) for the year to be a qualifying year.

Where earnings are between the lower earnings limit and the primary threshold, which for 2025/26 is aligned with the personal allowance at £12,570, primary contributions are payable at a notional zero rate. This means that the director or employee benefits from a qualifying year for state pension purposes without having to actually pay any primary Class 1 National Insurance contributions.

However, the same is not true for the employer. The reduction in the secondary threshold to £5,000 from 6 April 2025 means that the secondary threshold is now below the lower earnings limit and, unless the employment allowance is available to shelter employer contributions, paying a salary equal to the lower earnings limit will come with a secondary Class 1 National Insurance bill.

Personal companies where the sole employee paid above the secondary threshold is also a director do not benefit from the employment allowance. Consequently, where a salary is paid which is of a level which is sufficient for a year to be a qualifying year for state pension purposes, secondary contributions will be payable. On a salary of £6,500 (the minimum needed for a qualifying year), the associated secondary Class 1 National Insurance bill will be £225 (15% (£6,500 – £5,000)).

In a family company where the employment allowance is available, it is possible to pay a salary which is sufficient to secure a qualifying year without an associated secondary Class 1 liability.

Although it is only necessary to pay a salary of £6,500 for the year to be a qualifying year for state pension purposes, if the personal allowance is available in full, it is more tax efficient to pay a salary of £12,570, as the corporation tax deduction on the

salary and secondary Class 1 National Insurance will outweigh the secondary Class 1 National Insurance bill.