Dividend vs Salary 2026/27: The Most Tax-Efficient Way for Directors to Pay Themselves

Short answer: for most one-director companies in 2026/27, the most tax-efficient approach is still a salary of £12,570 with the rest of your profits taken as dividends. Dividend tax went up by 2 percentage points on 6 April 2026 (to 10.75% basic rate and 35.75% higher rate), which narrows the gap, but on £60,000 of company profit the salary-plus-dividends route still leaves you around £4,900 a year better off than taking everything as salary.

Why Does It Matter How You Pay Yourself?

As a limited company director in the UK, you have a significant advantage over sole traders and employees: you can choose how to extract profits from your business. The two main methods are salary and dividends, and the tax treatment of each is very different. Getting the mix right can save you thousands of pounds every year, while getting it wrong means you could be overpaying HMRC unnecessarily.

How Salary Is Taxed in 2026/27

Salary is subject to both Income Tax and National Insurance Contributions (NICs). As an employer, your company pays Employer's NIC at 15% on earnings above the Secondary Threshold of £5,000 per year. As an employee-director, you pay Employee's NIC at 8% on earnings between £12,570 and £50,270, and 2% above that. On top of that, Income Tax applies at 20% (basic rate, up to £50,270), 40% (higher rate, up to £125,140) and 45% (additional rate). These thresholds remain frozen.

The key advantage of salary is that it is a tax-deductible expense for your company, and so is the Employer's NIC on it. Both reduce your Corporation Tax bill. With Corporation Tax at 19% for profits up to £50,000, 25% for profits over £250,000 and marginal relief in between (an effective 26.5% on profits in that band), this deduction is valuable.

How Dividends Are Taxed in 2026/27

Dividends are paid out of post-tax profits, meaning your company has already paid Corporation Tax on those profits. However, dividends are not subject to National Insurance at all, which is where the saving comes from.

From 6 April 2026, the dividend tax rates increased by 2 percentage points for basic and higher rate taxpayers:

The dividend allowance remains £500. The first £500 of dividends is tax-free, but it still uses up part of your tax band, so it can push later dividends into the higher rate.

The Optimal Strategy: £12,570 Salary + Dividends

The most tax-efficient approach for the vast majority of directors is to take a salary equal to the Personal Allowance, £12,570 per year (£1,047.50 per month), and then extract additional profits as dividends. At £12,570 you pay no Income Tax and no Employee's NIC on the salary, and you get a qualifying year for State Pension purposes.

Your company will pay Employer's NIC on the amount above the £5,000 Secondary Threshold: £1,135.50 a year. Since the April 2025 changes, some directors have asked whether it is now better to drop the salary to £5,000. For a company paying 19% Corporation Tax, it usually is not. The extra £7,570 of salary plus £1,135.50 of Employer's NIC reduces Corporation Tax by about £1,654, and the £7,570 reaches you tax-free. Taking the same money as dividends would leave you with roughly £6,293 after Corporation Tax and dividend tax. The £12,570 salary still wins, and by more if your company pays the marginal 26.5% rate.

Worked Example: £60,000 of Company Profit in 2026/27

Assume a one-director company with £60,000 of profit before paying the director, no other employees (so no Employment Allowance), no other income for the director, and all profit extracted in the year. Here is how the two approaches compare:

In the all-salary case, the whole £60,000 goes on salary plus Employer's NIC (£52,826 × 1.15 − £750 = £60,000), so there is no profit left for Corporation Tax. In the mixed case, £46,295 of profit remains after salary and Employer's NIC, Corporation Tax at 19% is £8,796, and the remaining £37,499 is paid as a dividend. That dividend sits entirely within the basic rate band.

The salary-plus-dividends route saves around £4,895 a year. Under the 2025/26 dividend rates the saving on the same figures was about £740 higher, so the April 2026 increase has cost this director roughly £740 a year, but the strategy is still clearly worthwhile. Model your own numbers with our dividend tax calculator.

When a Higher Salary Might Make Sense

There are situations where a different salary level could be beneficial. If your company can claim the Employment Allowance (because it has at least one other employee), a salary above £12,570 can become more attractive, as the Employer's NIC may be covered. If you are making pension contributions through your company, your salary level can affect your personal contribution limits, although employer pension contributions are not limited by salary. And if you are applying for a mortgage, some lenders prefer to see a higher salary as evidence of stable, recurring income, although many will now also accept dividends backed by company accounts.

Directors who are higher rate taxpayers should also note that dividends above the basic rate band are now taxed at 35.75%. At that level, employer pension contributions (which are Corporation Tax deductible and free of NIC) become an increasingly attractive alternative to further dividends.

The Employment Allowance

Since April 2025, the Employment Allowance has increased to £10,500. This allows eligible employers to reduce their Employer's NIC bill by up to £10,500 per year. Importantly, single-director companies with no other employees are not eligible for the Employment Allowance. However, if your company employs at least one other person (even part-time), you may be able to claim this allowance, effectively wiping out the Employer's NIC cost on your director's salary entirely.

Dividend Paperwork: Getting It Right

HMRC requires that dividends are properly documented. You must hold a board meeting (even if you are the sole director) and record minutes declaring the dividend. You should also issue a dividend voucher for each payment, showing the date, the company name, the shareholder's name, and the amount. Dividends can only be paid out of distributable reserves — you cannot declare a dividend if your company does not have sufficient retained profits. Paying dividends when there are no profits available is known as an illegal dividend and can cause serious problems with HMRC and Companies House.

IR35 and Off-Payroll Working

If you operate through a personal service company and provide your services to clients, the IR35 legislation may affect you. If your engagement is deemed to be "inside IR35," the end client (for medium and large businesses) or you (for small clients) must account for PAYE and NIC as if you were an employee. In this scenario, the salary-plus-dividends strategy is overridden, and the entire fee is treated as employment income. It is essential to review your contracts and working practices to determine your IR35 status before planning your extraction strategy.

Frequently Asked Questions

What are the dividend tax rates for 2026/27?

10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band, after a £500 tax-free dividend allowance. The basic and higher rates both rose by 2 percentage points from 6 April 2026.

What is the best director's salary for 2026/27?

For most one-director companies with no Employment Allowance, £12,570 a year (£1,047.50 a month). It uses your full Personal Allowance with no Income Tax or Employee's NIC, gives you a State Pension qualifying year, and the Corporation Tax saving outweighs the £1,135.50 of Employer's NIC.

Is it still worth paying dividends after the 2026 tax rise?

Yes, for most directors. Dividends still avoid National Insurance entirely. In our worked example the saving over an all-salary approach falls from about £5,635 to about £4,895 a year, which is smaller but still significant.

Do I pay dividend tax through PAYE?

Usually not. Dividend tax is normally paid through Self Assessment, with the balancing payment due by 31 January after the end of the tax year. If your bill is over £1,000 you will usually also have to make payments on account. See our guide to registering for Self Assessment.

Key Takeaways

• Set your salary at £12,570 — this uses your full Personal Allowance, avoids Employee's NIC, and preserves your State Pension qualifying year.
• Take remaining profits as dividends — you save on National Insurance, which is the biggest source of tax savings for directors.
• Keep proper records — board minutes, dividend vouchers, and up-to-date management accounts are essential.
• Review annually — tax thresholds and rates change every year, so what is optimal this year may not be next year.
• Get professional advice — every director's situation is different. Speak to a chartered accountant to ensure you are making the most of the available planning opportunities.

Use our dividend vs salary calculator to model your own numbers, or read our guide on limited company vs sole trader if you are still deciding on the right structure. Our tax planning team can review your personal situation and recommend the optimal extraction strategy.