Salary or Dividends: How Should I Pay Myself as a Company Director in 2026/27?

Uncategorized· October 15, 2026 · 5 min read

For most small limited company directors, the most tax-efficient way to pay yourself in 2026/27 is still a modest salary topped up with dividends. Take a salary of £12,570 — matching the frozen personal allowance — and draw the rest as dividends, which carry no National Insurance. The arithmetic has tightened, though: dividend tax rates rose by two percentage points on 6 April 2026, so the gap between the two routes is narrower than it once was. Here is how the numbers stack up.

Why the salary-plus-dividends mix works

A salary is a deductible business expense, so it reduces your company’s Corporation Tax bill. Dividends are paid out of profits that have already been taxed, but they attract no National Insurance at all — employee or employer — and are taxed at lower personal rates than salary. Combining the two lets you use your tax-free personal allowance, keep your state pension record alive and avoid the heaviest NI charges. Most owner-managed companies we see at our accounts and corporation tax desk follow some version of this structure.

What salary should a director take in 2026/27?

The standard answer: £12,570

A salary of £12,570 exactly uses up the standard personal allowance, so no income tax is due, and it sits exactly at the employee National Insurance primary threshold, so the director pays no employee NI either. The company does pay employer NI at 15% on earnings above the £5,000 secondary threshold — £1,135.50 for the year — but both the salary and the employer NI are deductible for Corporation Tax, which claws back at least 19% of the cost. Because the salary comfortably exceeds the lower earnings limit, the year also counts towards your state pension.

The £10,500 Employment Allowance can wipe out that employer NI entirely — but only for eligible employers. A company whose only employee liable for employer (secondary) Class 1 NI is its sole director cannot claim it, which is why the allowance helps husband-and-wife companies and small teams far more than one-person companies.

The lower alternative: £6,708

Some sole directors prefer a salary at the lower earnings limit, which is £6,708 for 2026/27. At that level there is still no employee NI, employer NI falls to just £256.20, and the year still qualifies for state pension purposes. The trade-off is a smaller Corporation Tax deduction, so for most companies £12,570 remains the better-value option — run both through our salary and dividend tax calculator to see the difference for your own figures.

Dividend tax in 2026/27: what changed in April

From 6 April 2026 the ordinary and upper dividend rates each rose by two percentage points. For 2026/27 you pay:

0% on the first £500 of dividends (the dividend allowance);
10.75% on dividends within the basic rate band (total income up to £50,270);
35.75% on dividends in the higher rate band (£50,270 to £125,140);
39.35% on dividends above £125,140 (unchanged).

The full rate tables are published in HMRC’s tax on dividends guidance on GOV.UK. Even after the increase, 10.75% remains far cheaper than the 20% basic rate of income tax plus 8% employee NI that a salary of the same size would suffer.

Worked example: £60,000 profit, one director

Suppose your company expects £60,000 of profit in 2026/27 before paying you anything, and you want to extract the lot. Using the standard structure:

Salary: £12,570 — no income tax, no employee NI. Employer NI of £1,135.50 is due (no Employment Allowance for a sole director).
Corporation Tax: profit after salary and employer NI is £46,294.50. That is below £50,000, so the small profits rate of 19% applies: £8,796.
Dividends: the remaining £37,498 of post-tax profit is paid out. Total income is £50,068 — just inside the basic rate band. After the £500 allowance, £36,998 is taxed at 10.75%, giving dividend tax of £3,977.
Result: you keep £46,091 of the £60,000 — a combined tax cost of roughly £13,909, or about 23.2%.

Taking the whole £60,000 as salary instead would trigger income tax at 20% and 40%, employee NI at 8% and a much larger employer NI bill — several thousand pounds more tax for the same work.

Five things that can change the answer

Two or more people on the payroll: the Employment Allowance may cancel employer NI, strengthening the case for the £12,570 salary.
Profits above £50,000: marginal relief applies between £50,000 and £250,000, so extra profit is effectively taxed at 26.5% — making the Corporation Tax deduction on salary and pension contributions more valuable.
Pension contributions: employer pension contributions are usually the single most tax-efficient extraction method of all, with no NI and full Corporation Tax relief.
Other income: rental income, a second job or a partner’s unused allowances can shift the optimal split.
Dividends need distributable profits: you can only declare dividends out of accumulated post-tax profit, with proper board minutes and vouchers — otherwise HMRC can treat them as illegal dividends or loans.

If you are just setting up, getting the share structure right on day one makes all of this easier — see our company formation service for how we structure new companies tax-efficiently from the start.

Frequently asked questions

Can I skip the salary and take everything as dividends?

You can, but it rarely saves tax. You would waste your tax-free personal allowance, lose the Corporation Tax deduction a salary provides, and — unless you have credits from elsewhere — miss a qualifying year towards your state pension. A £12,570 salary costs little and protects all three.

Do I pay National Insurance on dividends?

No. Dividends attract no employee or employer National Insurance, which is the main reason the salary-plus-dividends structure beats a large salary even after the April 2026 rate rises.

When is dividend tax actually paid?

Through Self Assessment. Dividend tax for 2026/27 is reported on the return due by 31 January 2028, although payments on account may be required earlier if your bill is large enough.

Written by the Accountactical Team — ACCA-Approved Accountants, London.

This article is general information based on 2026/27 rates published on GOV.UK, not formal tax advice — speak to an accountant about your own circumstances before acting.