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Limited company

Director salary vs dividends in 2026/27

The salary-vs-dividends question used to have a tidy answer. Pay yourself a small salary up to the NIC threshold and take everything else as dividends. The 2024 and 2025 Budgets shifted the maths. Corporation tax is up, the dividend allowance is down to £500, and dividend rates rose 2%. The salary-up-to-the-NIC-threshold rule still holds. The layer above it needs more care.

By AfteraxLast reviewed 1 May 2026UK 2026/27 tax year

The 2026/27 numbers you need

  • Personal allowance. £12,570. Tapers from £100k, gone at £125,140.
  • Employer NIC. 15% above the £5,000 secondary threshold. The threshold dropped from £9,100 in April 2025, so every salary now incurs employer NIC much earlier.
  • Employment Allowance. £10,500. Most single-director companies cannot claim it. HMRC excludes companies where the only employee paid above the secondary threshold is a director.
  • Corporation tax. 19% small profits rate up to £50,000. 25% main rate from £250,000. Marginal relief in between (effective rate 26.5% in the marginal band).
  • Dividend allowance. £500.
  • Dividend rates 2026/27. 10.75% basic, 35.75% higher, 39.35% additional. Up 2% on basic and higher from April 2026.

Step 1: how much salary?

Salaries are tax-deductible at the company (saving corporation tax on every £1 paid). They cost the company employer NIC and the director income tax + employee NIC. So what is the optimal salary level?

For 2026/27 and most directors of small limited companies that cannot claim Employment Allowance, the practical answer is a salary equal to your personal allowance: £12,570. This is the “sweet spot” because:

  1. You pay zero income tax on the salary (it is covered by the personal allowance).
  2. You earn a qualifying year of State Pension contributions.
  3. Employer NIC is due on the slice above £5,000, about £1,136. Corporation tax relief at 26.5% (in the marginal band) gives you back about £301, so the net company cost of the NIC is around £835. Income tax saved on the gross salary swap with dividend at the basic level still nets ahead.
  4. Employee NIC kicks in at £12,570 too. Going a single pound higher starts costing 8% in employee NIC immediately. Do not.

Companies that can claim the £10,500 Employment Allowance (i.e. have at least one non-director employee paid over the secondary threshold) can push salary up to about £12,570 with the employer NIC fully covered. That makes the case marginally stronger.

Step 2: dividends, layered on top

Dividends are paid from post-corporation-tax profits, so the company does not get a deduction for them. You do not pay NIC personally either. After the £500 dividend allowance, you pay:

  • 10.75% on dividends within the basic-rate band (up to £50,270 of total income).
  • 35.75% on dividends within the higher-rate band (£50,270 to £125,140).
  • 39.35% on dividends in the additional-rate band (above £125,140).

Dividend rates apply aftercorporation tax has already been paid on the underlying profit. So the “total tax cost” on a basic-rate dividend in the marginal corporation tax band is about 26.5% + (1 minus 26.5%) × 10.75% ≈ 34.4%. It is the compound bite of two tax layers that catches first-time directors.

Worked example: £100,000 of company profit

Imagine a single-director company (no Employment Allowance) with £100,000 of profit before director pay. The director wants the maximum take-home. Using the £12,570 salary rule:

  1. Salary. £12,570 gross. Income tax: £0. Employee NIC: £0 (you are at the threshold, not above). Employer NIC: 15% × (£12,570 minus £5,000) = £1,135.50.
  2. Total cost to company. £12,570 + £1,135.50 = £13,705.50. This reduces taxable profit to £100,000 minus £13,705.50 = £86,294.50.
  3. Corporation tax. The £50k small-profits limit means £50,000 at 19% = £9,500, plus £36,294.50 at the 26.5% marginal effective rate ≈ £9,618. Total: £19,118.
  4. Profit available for dividends. £86,294.50 minus £19,118 = £67,176.50.
  5. Director takes the whole amount as a dividend. First £500 tax-free. £37,200 (the remainder of the basic-rate band, since the £12,570 salary used the personal allowance) at 10.75% = £3,999. The rest, £29,476.50 at 35.75% = £10,538. Total dividend tax: £14,537.
  6. Director's net take-home. £12,570 + (£67,176.50 minus £14,537) = £65,209. Total tax + NIC paid: £100,000 minus £65,209 = £34,791. Effective rate: 34.8%.

Step 3: the third lever most guides miss

Once your salary covers the personal allowance and you have planned your dividend, the single highest-leverage move is an employer pension contribution. The company pays directly into your SIPP. The contribution is corporation-tax-deductible (saving 19 to 26.5%), incurs no employer NIC, no employee NIC, and no dividend tax. The money grows tax-free in the pension wrapper.

For a marginal-band company (profits over £50k), every £1 of employer pension contribution costs about 73.5p of post-tax retained profit. The same £1 paid as a dividend at higher rate costs about 84p once you account for corporation tax + dividend tax. The pension route is meaningfully more efficient. The catch is liquidity: you cannot touch it until age 55 (rising to 57 from April 2028).

The Director mix calculator models the salary + dividend split end-to-end. We are working on adding employer pension contribution as a third lever. For now, model it manually as a pre-tax cost reducing taxable profit.

Watch-outs for 2026/27

  • Section 455 charge.If the company lends you money (a director's loan) and it is not repaid within 9 months of year end, the company pays a 33.75% temporary tax. It is refunded when repaid, but it is a cash-flow hit if you forget.
  • Dividend timing across tax years. Dividends are taxed in the year they are declared (made available), not the year they are paid. Splitting a large dividend across two tax years can push some of it into a lower band.
  • Double-cab pickups and BIK. From April 2025, double-cab pickups are taxed as cars rather than vans for benefit-in-kind purposes, with a sharp increase in BIK liability.
  • Spouse / partner shareholders.If your spouse genuinely works in the business and holds shares, splitting dividends across both basic-rate bands can save roughly £10,000+ on a £100k profit. Beware HMRC's settlements legislation if their involvement is purely cosmetic.
  • The 60% trap still applies to your total income. If salary plus dividends puts you between £100k and £125k, your personal allowance tapers. That adds 22% to the effective marginal rate on dividends in the trap zone.

Bottom line

For 2026/27, the playbook for most single-director companies: pay a salary equal to your personal allowance (£12,570). Take dividends to fill out the basic-rate band first. Then weigh up further dividends against employer pension contributions. The exact split depends on your company's profit level (which corporation tax band you are in), whether you can claim Employment Allowance, and how much of your income you actually need today versus could lock up in a pension.

Use the Director mix calculator to model your numbers, and the dividend tax calculator for quick what-ifs on the dividend layer.

Try the calculators

Director mix calculator

Model salary, corporation tax and dividend tax in one go

Dividend tax calculator

Just the dividend side, on its own

General information based on HMRC published rates · Not financial advice