Salary vs Dividends (2026/27)

Key facts

Dividends are taxed at 10.75% (basic), 35.75% (higher), and 39.35% (additional) for 2026/27.
The dividend allowance is £500 for 2026/27.
Salary attracts employer NI at 15% above £5,000 (from April 2025) and employee NI at 8%.
Most directors pay a small salary (around the NI threshold) and take the rest as dividends.
Salary is a deductible expense for Corporation Tax; dividends are paid from post-tax profits.

Why the Salary vs Dividends Question Matters

As a company director, you have flexibility in how you extract profits from your limited company. The two main routes are salary (subject to Income Tax and National Insurance) and dividends (subject to dividend tax but no NI). The right mix can save you thousands of pounds a year.^[1]

Important: Dividends can only be paid from distributable profits — after Corporation Tax. If your company has no profits, you cannot legally declare dividends.

Tax Rates Compared (2026/27)

Element	Salary	Dividends
Personal allowance	£12,570 tax-free	£12,570 tax-free (uses same allowance)
Basic rate (up to £37,700)	20% Income Tax	10.75% dividend tax
Higher rate (£37,701–£125,140)	40% Income Tax	35.75% dividend tax
Additional rate (over £125,140)	45% Income Tax	39.35% dividend tax
Dividend allowance	N/A	£500 tax-free
Employee NI	8% (£12,570–£50,270), 2% above	None
Employer NI	15% above £5,000	None
Corporation Tax deduction	Yes — salary is a business expense	No — paid from post-tax profits

Worked Example: £50,000 Profit

Suppose your company has £50,000 of profit available and you are the sole director with no other income. Here are two approaches:

Option A: All Salary (£50,000)

Item	Amount
Gross salary	£50,000
Employer NI (15% on £45,000)	−£6,750
Employee NI (8% on £37,700 + 2% on £430)	−£3,025
Income Tax (20% on £37,430)	−£7,486
Corporation Tax saving (salary + employer NI deductible)	+£0 (absorbed)
Take-home pay	£39,489
Total cost to company	£56,750

Option B: £12,570 Salary + £37,430 Dividends

Item	Amount
Salary (at personal allowance)	£12,570
Employer NI (15% on £7,570)	−£1,136
Employee NI / Income Tax on salary	£0 (within personal allowance & primary threshold)
Corporation Tax on remaining profit (25% on £36,294)	−£9,074
Dividend available	£27,220
Dividend tax (10.75% on £26,720 after £500 allowance)	−£2,872
Take-home pay	£36,918
Total tax & NI paid	£13,082

Result: Option B saves roughly £4,200 in total tax and NI compared to taking all salary. The bigger the profit, the bigger the saving — until you hit the higher rate band.

Choosing the Optimal Salary Level

There are three common salary levels for company directors in 2026/27:

Salary Level	Amount	Why Choose It
Below NI secondary threshold	£5,000	No employer or employee NI at all; still counts as a qualifying year for State Pension
NI primary threshold	£12,570	Uses full personal allowance; no employee NI; employer NI on £7,570
Higher salary	Varies	May be needed for pension contributions, mortgage applications, or visa requirements

If you set your salary at £12,570, you use your entire personal allowance and pay no employee NI (the primary threshold matches the personal allowance). Your company pays employer NI of 15% on the amount above £5,000 but saves Corporation Tax on the total salary plus employer NI cost.^[3]

Employer NI Increase from April 2025

From April 2025, the employer NI rate increased from 13.8% to 15%, and the secondary threshold dropped from £9,100 to £5,000. This makes salary relatively more expensive and strengthens the case for a low salary plus dividends strategy for many directors.^[3]

Other Factors to Consider

State Pension: You need a salary at or above the Lower Earnings Limit (£6,708 for 2026/27) to build a qualifying year, though NI is not actually payable until the primary threshold.
Pension contributions: Personal pension contributions require “relevant UK earnings” (salary). Employer contributions do not have this restriction and are also Corporation Tax deductible.
Mortgage applications: Lenders typically look at salary plus dividends. Some prefer higher salary evidence.
IR35 / off-payroll: If you are inside IR35, your fee income is treated as deemed salary — you cannot choose to take dividends.
Corporation Tax rate: The small profits rate of 19% (profits under £50,000) makes the salary-vs-dividends calculation slightly different from the 25% main rate.

Small profits rate: If your company’s profits are under £50,000, Corporation Tax is 19%. Between £50,000 and £250,000, marginal relief applies. Above £250,000, the full 25% rate applies.^[4]

Frequently Asked Questions

What is the most tax-efficient way to pay yourself from a limited company?

For most single-director companies in 2026/27, the most tax-efficient strategy is to pay a salary around the NI secondary threshold (£5,000) or the personal allowance (£12,570), and take the remainder as dividends. The optimal split depends on your other income, available profits, and whether you want to build NI qualifying years.

Do dividends count as earned income for pension purposes?

No. Dividends are not “relevant UK earnings” for pension contribution purposes. Only salary (employment income) counts. If you want to make large personal pension contributions, you need sufficient salary to support them — or contribute via an employer (company) pension instead.

Can I just pay myself entirely in dividends?

Technically yes, but this means no Corporation Tax deduction for salary, no NI qualifying year for State Pension, and no relevant earnings for personal pension contributions. A small salary is almost always beneficial.

Has the dividend tax rate changed for 2026/27?

Yes. From 6 April 2026 the ordinary and upper dividend rates each rose by 2 percentage points, to 10.75% (basic rate) and 35.75% (higher rate). The additional rate is unchanged at 39.35%, and the dividend allowance stays at £500.

Sources

Tax on dividends — GOV.UK
Income Tax rates and personal allowances — GOV.UK
National Insurance rates and categories — GOV.UK
Corporation Tax rates — GOV.UK