Every limited company director faces the same question once the profits start coming in: how do I pay myself — salary, dividends, or a mix of the two? The answer matters more in 2026/27 than it did a year ago. Dividend tax rates rose by two percentage points in April 2026, employer National Insurance is now 15% on earnings above just £5,000, and the old rules of thumb no longer produce the old savings. Get the split right and you keep several thousand pounds more of the same profit. Get it wrong and you pay tax twice — or take dividends your company was never allowed to pay.
This guide explains how each route is taxed in 2026/27, works through a full £60,000 example, and ends with a decision checklist. It is general guidance, not personal tax advice: your company’s profit level and your other income change the numbers.
How a director’s salary works
A salary is the straightforward route. Your company runs payroll, deducts income tax and employee National Insurance through PAYE, and pays you a regular monthly amount. For 2026/27, the key figures are the £12,570 personal allowance, income tax at 20% on earnings up to £50,270, 40% above that and 45% above £125,140, and employee National Insurance at 8% on earnings between £12,570 and £50,270, then 2% above that.
Salary has three advantages no other method can match. First, it is a deductible business expense, so every pound of salary reduces your company’s taxable profit and saves corporation tax at 19% or 25%. Second, it counts towards your State Pension: a salary above the lower earnings limit earns a qualifying year, which dividends never do. Third, lenders love it: banks treat salary as reliable income and dividends with suspicion, so directors planning a house move often need a higher salary than the tax maths suggests.
The cost is National Insurance on both sides. Your company pays employer National Insurance at 15% on everything above the £5,000 secondary threshold, with no upper limit, and you pay employee National Insurance on top. A £50,000 salary costs your company £6,750 in employer National Insurance alone.
How dividends work
Dividends are a share of your company’s profit, paid to you as a shareholder rather than as an employee. They are paid from profit after corporation tax: your company pays corporation tax first, and only then distributes what is left. Dividends are not a business expense, so they do nothing to reduce the corporation tax bill.
In exchange, dividends attract no National Insurance at all, for you or for the company, and they are taxed at lower rates than salary. For 2026/27 the dividend allowance is £500, and above that the rates are 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. Those first two rates rose by two percentage points on 6 April 2026, from 8.75% and 33.75%. The 28 October 2026 Budget left dividend rates unchanged, so these are the rates to plan around for the rest of the tax year.
Dividends also come with rules salary does not. They can only be paid from distributable profits — retained profits after tax, not from turnover or a loan. If the company has not made enough profit, a dividend is an unlawful distribution and can create a personal liability for the director. Every dividend should be documented with board minutes and a dividend voucher, and declared on your Self Assessment tax return if it exceeds your allowances.
The 2026/27 numbers at a glance
| Item | 2026/27 figure |
|---|---|
| Personal allowance | £12,570 |
| Basic rate band | Up to £50,270 at 20% |
| Higher rate band | £50,271–£125,140 at 40% |
| Additional rate | Above £125,140 at 45% |
| Dividend allowance | £500 at 0% |
| Dividend tax — basic / higher / additional | 10.75% / 35.75% / 39.35% |
| Employee National Insurance | 8% on £12,570–£50,270, 2% above |
| Employer National Insurance | 15% above £5,000 a year |
| Corporation tax | 19% up to £50,000 profit, 25% above £250,000, marginal relief between |
Worked example: £60,000 of profit, two routes
The example below shows what the rates cost in practice. Assume your company has £60,000 of profit before paying you anything, and compare taking it as salary against the standard low-salary-plus-dividends split.
| Route A: £50,000 salary | Route B: £12,570 salary + dividends | |
|---|---|---|
| Salary | £50,000 | £12,570 |
| Income tax | £7,486 (20% of £37,430) | £0 |
| Employee NI | £2,994 (8% of £37,430) | £0 |
| Employer NI | £6,750 (15% of £45,000) | £1,136 (15% of £7,570) |
| Corporation tax | £618 (19% of £3,250 left) | £8,796 (19% of £46,294 left) |
| Dividends paid | — | £37,499, taxed at £3,977 (10.75% after £500 allowance) |
| Total tax | £17,848 | £13,909 |
| You keep | £39,520 | £46,092 |
The difference is £3,939 less tax on the same £60,000 of profit, and £6,572 more in your pocket. That is the dividend advantage in 2026/27: narrower than before the April 2026 rate rise, but still worth several thousand pounds a year at this profit level. (Figures are rounded to the nearest pound.)
The standard split — and when to change it
For most sole directors with no other income, the standard approach remains a salary at or near £12,570 with dividends for the rest. The salary uses the personal allowance, attracts no income tax and no employee National Insurance, earns a qualifying year towards the State Pension, and reduces the corporation tax bill. The dividends then carry the rest of the income at 10.75% in the basic rate band, with no National Insurance on either side.
Some directors take around £5,000 instead, avoiding employer National Insurance entirely and saving about £1,136 — but a salary below the lower earnings limit earns no qualifying year towards the State Pension. For most directors £12,570 is the better balance.
When a higher salary makes sense
If you are applying for a mortgage, lenders weight salary far more heavily than dividends, and a higher salary can be the difference between approval and rejection. If you are close to a State Pension shortfall, salary is the only route that helps. And if your company has not yet made enough profit to pay dividends legally, salary is the only lawful way to take money out — dividends from a loss-making company are unlawful.
When to lean harder on dividends
Dividends win when the company is comfortably profitable, you have no mortgage application in the next year or two, and your total income stays within the basic rate band. The higher your profit, the more the absence of National Insurance matters, because employer National Insurance has no upper limit — 15% on every pound above £5,000, all the way up. At £100,000 of salary, employer National Insurance alone is £14,250.
The £100,000 trap
One threshold catches more directors every year, because it has been frozen while incomes rise: once your total income passes £100,000, you start losing your personal allowance at £1 for every £2 over £100,000, until it disappears at £125,140. In that band the effective marginal tax rate on dividends is roughly 53.6%, because you pay dividend tax and lose allowance on the same pound. If your salary and dividends together are approaching £100,000, stop and plan: employer pension contributions, deductible for corporation tax and free of National Insurance, are often a far better use of the next pound.
The mistakes that cost directors money
The most expensive mistake is taking dividends the company cannot afford. Dividends must come from distributable profits: paying them from turnover, from a directors’ loan account in debit, or from a loss-making company can make the dividend unlawful, with the money repayable. Keep a running record of profit after tax and check it before every dividend.
The second mistake is forgetting employer National Insurance when setting the salary — a £12,570 salary costs the company £13,706 once it is included. The third is assuming the Employment Allowance will cover it. It is worth up to £10,500 a year, but it is generally not available where a director is the only employee paid above the secondary threshold, which describes most single-director companies.
Finally, do not ignore the paperwork: dividends need board minutes and a voucher, and dividend income above your allowances must be reported on your Self Assessment return. HMRC charges interest and penalties for late returns, and with Making Tax Digital for Income Tax now live, the reporting net is only getting tighter.
Your decision checklist
First, work out your company’s profit after corporation tax — that is the maximum you can take as dividends. Second, decide whether you need a higher salary for a mortgage application or pension reasons in the next twelve months; if so, set the salary first and take the rest as dividends. Third, if there is no such reason, take a salary of around £12,570 and the balance as dividends, and check which dividend tax band the dividends will fall into. Fourth, if your total income is approaching £100,000, pause and consider employer pension contributions before taking more income. Fifth, document every dividend with minutes and a voucher.
The bottom line
In 2026/27, the low-salary-plus-dividends split is still the most tax-efficient way for most limited company directors to pay themselves, even after the dividend tax rise of April 2026. On £60,000 of profit it saves roughly £3,900 of tax against an all-salary route, because dividends escape National Insurance entirely and are taxed at 10.75% in the basic rate band. But the split is a starting point, not a rule: mortgage plans, pension gaps, profit levels and the £100,000 allowance trap can all justify a different answer.
Related reading
Corporation tax marginal relief
Making Tax Digital for Income Tax