Salary vs Dividends 2026/27: Tax Efficient Pay for Directors

Model your own split with the limited company tax calculator, estimate dividend tax with the dividend tax calculator, or compare structures in limited company vs sole trader.

Why directors mix salary and dividends

A director who owns a limited company can take money out as salary, as dividends, or a mix of both. Salary is a deductible business expense for the company, which reduces corporation tax, and it builds qualifying years toward the State Pension if it is above the National Insurance lower earnings limit.

Dividends are paid from profits after corporation tax. They are taxed at lower dividend rates and do not attract employee or employer National Insurance. That is why most directors take a modest salary and the rest as dividends rather than one large salary.

How dividends are taxed in 2026/27

For 2026/27, the first £500 of dividend income is covered by the dividend allowance and taxed at 0 percent. After the allowance, the three dividend rates are: 8.75% ordinary rate, 33.75% upper rate, and 39.35% additional rate. Which rate applies depends on how much of your income tax bands remain after salary and other income.

Dividends sit on top of other income. Salary uses the Personal Allowance and basic rate band first, then dividends fill any remaining space in each band. See the full rate tables in our dividend tax rates guide.

The common salary levels and the National Insurance point

Two common salary choices are a salary up to the £12,570 Personal Allowance, which uses all tax free pay and counts as a qualifying year for State Pension, or a lower salary at the £5,000 National Insurance secondary threshold if you want to minimise employer National Insurance.

Employer National Insurance is 15% on salary above £5,000. A salary between £5,000 and £12,570 triggers employer NI of about £1,135.50 on the £7,570 above the threshold, unless the Employment Allowance of £10,500 covers it.

A sole director company with no other employees cannot claim the Employment Allowance. If that applies to you, employer NI on a £12,570 salary is a real cost to weigh against the State Pension and corporation tax benefits.

A worked example

Assumptions: one director, England, Wales or Northern Ireland, this is their only income, sole director with no Employment Allowance, company profit before director pay £60,000, salary £12,570, remaining profit taken as dividends after corporation tax.

The salary saves corporation tax at 19% on company profits up to £50,000. Dividends do not reduce corporation tax because they are a distribution of profit that has already been taxed.

Corporation tax matters too

Salary and employer National Insurance reduce the company's taxable profit before corporation tax is calculated. For 2026/27, corporation tax is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief between those limits.

Dividends do not reduce corporation tax because they are paid from post tax profit. That is a key part of the salary versus dividend comparison. Use the corporation tax calculator to see how salary changes the company tax bill.

This is general information

This guide is general information, not financial or tax advice. The best salary and dividend split depends on your company profits, other household income, Employment Allowance eligibility, pension plans, and whether you need to retain cash in the company.

A quick check with a qualified accountant is worthwhile before you fix your remuneration for the year, especially if profits are near the corporation tax marginal relief band or your personal income is near £100,000.