Salary vs dividends 2026/27: the most tax-efficient way to pay yourself as a company director
By Hussein Bhaiji FCCA CTA, Managing Partner. Last reviewed: October 2026.
If you run your own limited company, how you pay yourself is the most valuable decision you make each year. Salary vs dividends in 2026/27 is no longer a simple choice. In 2026/27 the right answer has changed. Dividend tax rates rose on 6 April 2026, the ordinary rate from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. Add the changes from April 2025, employer National Insurance at 15% from a £5,000 threshold and an Employment Allowance of £10,500, and the old advice no longer holds for every director. So what is genuinely the most tax-efficient split between salary and dividends now, and how do you know which side of the line you are on?
Why the salary vs dividends question matters more than it used to
Salary is a tax-deductible expense for your company, but it attracts Income Tax and National Insurance for both you and the business. Dividends are not earnings, so they carry no National Insurance, but they can only be paid out of profit that has already borne Corporation Tax, and they are now taxed at higher rates than before. The two routes must be compared on a combined basis, company and personal together, because looking at either in isolation gives you the wrong answer.
For most of the last decade, the rule of thumb was simple: take a small salary and the rest as dividends. That rule still holds for many single-director companies, but not for every company, and following it out of habit can cost a director whose company has the Employment Allowance around £1,500 a year at £100,000 of profit.
Dividend tax rates 2026/27 and how salary is taxed
For 2026/27 the dividend tax rates are 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate), after a £500 dividend allowance.
Dividend allowance and key rates for 2026/27
The dividend allowance for 2026/27 is £500, so the first £500 of dividends is taxed at 0% but still counts towards your tax band.
| 2026/27 rate | |
|---|---|
| Dividend allowance | £500 (taxed at 0%) |
| Dividend ordinary rate (basic-rate band) | 10.75% (was 8.75%) |
| Dividend upper rate (higher-rate band) | 35.75% (was 33.75%) |
| Dividend additional rate | 39.35% (unchanged) |
| Employee National Insurance | 8% between £12,570 and £50,270, then 2% |
| Employer National Insurance | 15% above the £5,000 secondary threshold |
| Employment Allowance | £10,500 (if eligible) |
| Corporation Tax | 19% up to £50,000; 26.5% marginal band £50,000 to £250,000; 25% above £250,000 |
| Personal allowance / higher-rate threshold | £12,570 / £50,270 |
What is the optimal director salary in 2026/27?
The traditional answer is a salary of £12,570, the personal allowance and the employee National Insurance primary threshold. Anything above the £6,708 lower earnings limit earns a qualifying year towards your state pension, the salary is deductible for Corporation Tax, and at £12,570 you pay no Income Tax or employee National Insurance on it. That is still a sound starting point. But whether you should stop there or go considerably higher depends almost entirely on one question that most directors have never been asked: can your company claim the Employment Allowance?
Note
A common mistake is a director paying themselves a round £30,000 salary “because it feels normal”. In our experience that number is almost never the efficient answer. It is neither low enough to minimise National Insurance nor high enough to exploit the Corporation Tax and Employment Allowance interaction. We see it on new client files every month.
The worked example that changes the answer
Here are the numbers. Take a company making £100,000 of profit before the director’s pay, where the director wants to extract all of it, and assume the company can claim the Employment Allowance. Compare four routes. The figures assume the whole £10,500 allowance is available against the director’s salary, for example where two director-shareholders are both on the payroll. If other staff already use part of it, or the company takes on an employee in order to qualify, their wages and employer National Insurance have to be built into the calculation.
Example 1: £100,000 profit, fully extracted, Employment Allowance available
| A. Salary £12,570 + dividends | B. Salary £50,270 + dividends | C. All salary (£96,739) | D. Salary £75,000 + dividends | |
|---|---|---|---|---|
| Corporation Tax | £19,419 | £9,449 | £0 | £4,750 |
| Employer NIC (after Employment Allowance) | £0 | £0 | £3,261 | £0 |
| Employee NIC | £0 | £3,016 | £3,945 | £3,511 |
| Income Tax | £0 | £7,540 | £26,128 | £17,432 |
| Dividend Tax | £14,835 | £14,222 | £0 | £7,061 |
| Total tax paid | £34,254 | £34,227 | £33,334 | £32,753 |
| Net cash in your pocket | £65,746 | £65,773 | £66,666 | £67,247 |
Verdict: a £75,000 salary (D) wins. It leaves you £67,247, about £1,500 more than the traditional route (A) and about £580 more than taking everything as salary (C). £75,000 is the point at which employer National Insurance on the salary, (£75,000 minus £5,000) × 15%, uses up exactly the £10,500 Employment Allowance; every pound of salary above that carries 15% employer National Insurance again.
These figures use the income tax rates for England, Wales and Northern Ireland. Scottish taxpayers pay income tax on salary at different rates (42% from £43,663 and 45% from £75,001 in 2026/27), while dividend tax rates are the same across the UK, so a director in Scotland needs the calculation run on Scottish rates.
This is the reverse of the advice most directors are still being given. Once your income is above £50,270, employee National Insurance on salary drops to just 2%, so an extra pound of salary costs you 40% Income Tax plus 2% National Insurance, 42% in total. An extra pound taken as dividend has already suffered Corporation Tax at 26.5% in the marginal band, and is then taxed at 35.75%, giving a combined cost of nearly 53%. The Employment Allowance wipes out the employer’s National Insurance that would otherwise make salary expensive. Put those three things together and salary wins, up to the point where the allowance runs out.
Example 1b: the same company without the Employment Allowance
Now run exactly the same company, £100,000 of profit with all of it extracted, for a director whose company cannot claim the Employment Allowance.
| A. Salary £12,570 + dividends | B. Salary £50,270 + dividends | C. All salary (£87,609) | |
|---|---|---|---|
| Corporation Tax | £19,118 | £8,159 | £0 |
| Employer NIC (no Employment Allowance) | £1,136 | £6,790 | £12,391 |
| Employee NIC | £0 | £3,016 | £3,763 |
| Income Tax | £0 | £7,540 | £22,475 |
| Dividend Tax | £14,537 | £12,255 | £0 |
| Total tax paid | £34,790 | £37,760 | £38,630 |
| Net cash in your pocket | £65,210 | £62,240 | £61,370 |
Verdict: without the Employment Allowance, the low salary plus dividends route (A) wins decisively, by around £3,840 over the all-salary route.
Note
Two companies with the same profit and the same director, and the correct answer is the exact opposite depending on one factor: whether the Employment Allowance is available. Apply one rule of thumb to both and one of them loses out: by about £900 to £1,500 at this profit level if the company with the allowance stays on a low salary, or by about £3,840 if the company without it pays everything as salary. This is precisely the kind of calculation Chartered Tax Advisers run and general compliance accountants often do not.
The Employment Allowance catch: can a single-director company claim it?
Here is the condition that decides it. A company whose only employee is a single director generally cannot claim the Employment Allowance. That is the position most one-person companies are in, and it is why the traditional low-salary-plus-dividends advice has held good for so long.
The fix is straightforward, and it is commercial rather than clever. Take on a second employee paid above the secondary threshold of £417 a month (£96 a week, £5,000 a year). They do not need to be on the payroll all year. A second qualifying employee for even part of the tax year can make the company eligible to claim the full £10,500 Employment Allowance for that year. Two limits apply. If you control more than one company, only one company in the connected group can claim the allowance. And the single-director exclusion is statutory (National Insurance Contributions Act 2014, s.2(4A), inserted by SI 2016/344): it bites where every payment of earnings in the year goes to one employee who is a director. For many family businesses that simply means paying a genuinely working spouse or family member a proper wage for real work they actually do.
Warning
Get this wrong and HMRC will unpick it. The employment must be genuine, the work must be real, the wage must be commercially justifiable, and the paperwork must exist before the fact, not after it. A spouse “employed” on paper purely to qualify for the allowance, doing no identifiable work, is exactly what HMRC looks for in an enquiry. Our team includes professionals who have worked inside HMRC, so we make sure the structure stands up before you rely on it, because the cost of getting it wrong exceeds the allowance you were chasing.
Watch: who can claim the £10,500 Employment Allowance
This short video covers who can claim the allowance, how it works and the mistakes that cost employers the full £10,500.
What if you do not need to draw all the profit?
Everything above assumes you are extracting every penny. Many owner-managers are not. If you can leave surplus profit in the company, the answer depends on how, and at what rate, that profit eventually comes out.
Example 2: £100,000 profit, but only £50,000 drawn
Sam runs the same company but only needs £50,000 this year, leaving the rest in the business to fund growth. Compare the low-salary-plus-dividend route against taking the whole £50,000 as salary.
| A. Salary £12,570 + £37,430 dividend | B. £50,000 all as salary | |
|---|---|---|
| Corporation Tax | £19,419 | £9,500 |
| Employer NIC (after Employment Allowance) | £0 | £0 |
| Employee NIC | £0 | £2,994 |
| Income Tax | £0 | £7,486 |
| Dividend Tax | £3,970 | £0 |
| Total tax paid | £23,389 | £19,980 |
| Net cash in your pocket | £46,030 | £39,520 |
| Reserves retained in the company (after CT) | £30,581 | £40,500 |
| Total value preserved (cash + reserves) | £76,611 | £80,020 |
Verdict: route B pays £3,409 less tax this year, but that does not leave Sam better off. It puts £6,510 less in Sam’s pocket (£39,520 against £46,030), and the extra £9,919 left in the company is taxed again when it comes out. If those reserves are later drawn as dividends at the higher rate, route A ends up about £140 ahead. Salary only pulls ahead if the retained profit is eventually taken out at the basic rate, or never taken out at all.
A simple rule of thumb for 2026/27
If your company can claim the Employment Allowance and has not already used it on other staff, a salary well above £12,570 (often up to £75,000, where employer National Insurance on the salary uses up the whole £10,500 allowance) tends to beat the traditional route when you extract everything and your profit is between roughly £75,000 and £120,000, or above roughly £140,000. Below about £75,000, and between about £120,000 and £140,000, the low-salary route still wins or the difference is negligible, because of the way the higher-rate band and the £100,000 personal allowance taper interact. Where you leave profit in the company, the comparison turns on the rate at which it is eventually taken out. If your company cannot claim the Employment Allowance, which is the position of most single-director companies, low salary plus dividends still wins for full extraction up to profits of roughly £190,000. Because the answer turns on your exact profit, how much you actually draw, your other income and your longer-term plans, this is a calculation worth running properly every year rather than defaulting to a round salary out of habit.
Tip
Do not forget pension contributions. An employer pension contribution is deductible for Corporation Tax, carries no National Insurance and no Income Tax, and for profits in the 26.5% band it is frequently the most efficient pound your company can spend. Contributions count towards your £60,000 annual allowance (less if the taper applies, with unused allowance from the previous three years available to carry forward), and the contribution must be justifiable as part of your overall remuneration for the deduction to stand. It should be modelled alongside salary and dividends, not bolted on afterwards.
The traps that catch owner-managers
Three mistakes recur. Paying dividends without sufficient distributable profits breaches Companies Act 2006 s.830, and a shareholder who knew or should have known must repay them under s.847. They are then open to challenge and to being treated as salary or a loan, with tax to match. Poor paperwork, meaning missing dividend vouchers and board minutes, is one of the first things HMRC asks for in an enquiry. And ignoring the interaction with the £100,000 personal allowance taper, or with the High Income Child Benefit Charge, can push your effective rate far above anything in the tables above. Dividends above your allowances must also go on your self assessment tax return.
Warning
Dividends must be supported by real distributable profits and proper documentation, created at the time. Drawing money through the year and calling it a dividend afterwards rarely survives an HMRC enquiry, and we have seen it reclassified as a debit on your director’s loan account with a s.455 CTA 2010 charge attached, now 35.75% of the loan for loans made from 6 April 2026, which then has to be reported on the company’s corporation tax return. We set the paperwork up correctly from the start.
How Merit helps you pay yourself the smart way
As Chartered Tax Advisers we do more than run your payroll and file your accounts. We build a year-round remuneration strategy that blends salary, dividends, pension contributions and profit retention around your actual goals and, as the tables above show, in 2026/27 that strategy may look nothing like the one you have been running. We build the structure to stand up to an HMRC enquiry, not just to look tidy. And because our partners, who you can meet on our who we are page, have built their own businesses from nothing to over £1m in turnover, the plan fits your real life and your real cash-flow needs, not just the spreadsheet.
If you have not recalculated your remuneration since the dividend rates changed in April 2026, it is worth checking which of these tables you belong in. The first step is simple: establish whether your company can claim the Employment Allowance, because everything else follows from that. We will run the numbers for your actual figures and tell you which route you should be on this year. Contractors working through their own limited company face the same choice, and our contractor accountants run the same review for them.
Frequently asked questions
Is it better to take dividends instead of salary in 2026/27?
It depends on the Employment Allowance. If your company can claim it and has not used it on other staff, a salary well above £12,570 (often up to £75,000) frequently beats a low salary plus dividends when you extract all the profit, particularly where profits are between about £75,000 and £120,000. If you cannot claim it, low salary plus dividends still wins at most profit levels.
How should I pay myself from my limited company in 2026/27?
It depends on the Employment Allowance. If your company can claim it and has not used it on other staff, a salary well above £12,570 (often up to £75,000) frequently beats a low salary plus dividends when you extract all the profit, particularly where profits are between about £75,000 and £120,000. If you cannot claim it, low salary plus dividends still wins at most profit levels.
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 dividend allowance. The ordinary and upper rates each rose by 2 percentage points on 6 April 2026.
What is the optimum director salary for 2026/27?
For a company that cannot claim the Employment Allowance, a salary of £12,570 remains the efficient starting point. For a company that can claim it, a much higher salary is frequently better. The optimum depends on your profit and how much you draw, so it should be calculated rather than assumed.
Do dividends save National Insurance?
Yes, dividends carry no National Insurance, which is why they have historically formed part of an efficient package. But they are paid from profit that has already borne Corporation Tax at up to 26.5%, and they are now taxed at higher rates, so the saving is smaller than it was.
Can a single-director company claim the Employment Allowance?
Generally not, where the director is the only employee. Taking on a second employee paid above the secondary threshold of £417 a month (£96 a week, £5,000 a year) can make the company eligible for the full £10,500 allowance, but the employment must be genuine and properly documented, or HMRC will challenge it.
Can I pay dividends to my spouse?
If your spouse genuinely owns shares, dividends can be paid to them and may use their allowances and lower rate bands. The share structure must be set up correctly to withstand HMRC scrutiny, particularly the settlements legislation in ITTOIA 2005 s.624 and the spouse exception in s.626, which protected the taxpayers in Jones v Garnett [2007] UKHL 35 (the Arctic Systems case). The exception does not apply where the shares given are wholly or substantially a right to income, so separate dividend-only share classes need particular care.
What if my income goes over £100,000?
Between £100,000 and £125,140 your personal allowance is withdrawn at £1 for every £2 of income, which creates an effective 60% rate on salary. See our guide on avoiding the 60% tax trap.
See how remuneration planning, pension contributions and the Employment Allowance have cut tax for directors in our owner-managed business tax case studies.
The dividend rates changed in April 2026. Has your pay structure? Merit Accountants are Chartered Certified Accountants and Chartered Tax Advisers who run the actual numbers on your figures, not a rule of thumb, from our Manchester, London and Potters Bar offices, and our team includes professionals who have worked inside HMRC. Book a free review of how you take income. Our monthly management accounts then keep it under review all year.