Salary vs dividends 2026/27: how to pay yourself tax-efficiently
A clear guide for UK limited company directors, with the latest rates and a worked example.
The short answer: for most limited company directors in 2026/27, the most tax-efficient approach is a salary of £12,570, with the rest of your income taken as dividends. Keeping your total income at or below £50,270 keeps your dividends in the 10.75% basic rate band. Pension contributions paid by your company can save even more.
As a director and shareholder, you can take money out of your limited company as a salary, as dividends, or as a mix of both. Each is taxed differently, and the right mix can save you thousands of pounds a year. Here is how it works for the 2026/27 tax year (6 April 2026 to 5 April 2027).
Key figures for 2026/27
| Rate or allowance | 2026/27 |
|---|---|
| Personal Allowance (tax-free income) | £12,570 |
| Dividend Allowance | £500 |
| Dividend tax – basic rate | 10.75% |
| Dividend tax – higher rate | 35.75% |
| Dividend tax – additional rate | 39.35% |
| Basic rate band ends at | £50,270 |
| Employer NI – rate and threshold | 15% above £5,000 |
| Employee NI starts at | £12,570 |
| Lower Earnings Limit (State Pension) | £6,708 |
| Employment Allowance | up to £10,500 |
| Corporation Tax | 19% to 25% |
The basic and higher dividend tax rates rose by two percentage points on 6 April 2026, so planning your mix of salary and dividends matters more than it did last year.
How a director's salary is taxed
A salary is paid through your company's payroll. It is subject to Income Tax and National Insurance, but it is also a business expense, so it reduces your company's Corporation Tax.
- You pay no Income Tax or employee National Insurance on a salary up to £12,570.
- Your company pays employer National Insurance at 15% on salary above £5,000, unless it can claim the Employment Allowance.
- A salary above £6,708 counts towards your State Pension, even though you pay no National Insurance on it.
How dividends are taxed
Dividends are paid to shareholders out of profit that has already been taxed. Your company pays Corporation Tax first, then you pay dividend tax personally:
- The first £500 of dividends is tax-free (the Dividend Allowance).
- Any unused Personal Allowance also covers dividends.
- Above that, dividends are taxed at 10.75%, 35.75% or 39.35% depending on your total income.
- There is no National Insurance on dividends.
What salary should I take in 2026/27?
If your company can claim the Employment Allowance
If your company has at least one employee or a second director paid above £5,000, a salary of £12,570 is usually the best choice. You pay no personal tax on it, the Employment Allowance covers the employer National Insurance, and the salary reduces your Corporation Tax.
If you are the only director with no employees
Sole-director companies cannot claim the Employment Allowance, so a salary of £12,570 costs your company about £1,136 in employer National Insurance. Even so, because the salary and the National Insurance both reduce Corporation Tax, £12,570 is still slightly more tax-efficient than £5,000 for most profitable companies. A salary of £5,000 to £6,708 can make sense if your company makes little or no profit.
Worked example: £60,000 profit, sole director
Your company makes £60,000 profit before paying you. You take a salary of £12,570 and pay out the rest of the profit as dividends.
| Step | Amount |
|---|---|
| Profit before your salary | £60,000 |
| Your salary | £12,570 |
| Employer NI (15% on £7,570) | £1,136 |
| Taxable profit | £46,294 |
| Corporation Tax at 19% | £8,796 |
| Profit available for dividends | £37,498 |
| Dividend tax (£500 tax-free, the rest at 10.75%) | £3,977 |
| You take home | £46,091 |
All of this income stays within the basic rate band, so none of the dividends are taxed at 35.75%. Figures are rounded to the nearest pound.
Pension contributions: the often-missed saving
When your company pays into your pension, the contribution is usually a business expense, so it reduces Corporation Tax, and there is no Income Tax or National Insurance on it. For example, a £5,000 company pension contribution saves £950 in Corporation Tax at the 19% rate. It is one of the most effective ways to extract profit, especially if you would otherwise pay dividend tax at 35.75%.
Watch out for the higher rate
Once your total income goes above £50,270, dividends are taxed at 35.75% instead of 10.75%. Above £100,000, you also start to lose your Personal Allowance. If you do not need all the money now, you can leave profit in the company, pay more into your pension, or spread withdrawals across tax years.
Common mistakes to avoid
- Paying dividends without enough profit. A dividend can only be paid from retained profit after Corporation Tax.
- No paperwork. Every dividend should have board minutes and a dividend voucher.
- Treating the company bank account as your own. Money taken out that is not salary or a dividend goes to your director's loan account, which can create extra tax charges.
- Forgetting your Self Assessment. Dividend tax is paid through your personal tax return by 31 January.
- Deciding after the year has ended. By then it is too late to change your salary, pension contributions or the timing of dividends.
Plan your salary and dividends before your year-end
Every Financial 247 client gets regular reports showing their profit and estimated Corporation Tax, so we can plan your salary, dividends and pension contributions while there is still time to act.
Book a free strategy callFrequently asked questions
Can I pay myself only in dividends?
You can, but it is rarely the best option. A salary of at least £6,708 in 2026/27 protects your State Pension record, and for most companies a salary of £12,570 is more tax-efficient than taking the same amount as dividends, because salary reduces your Corporation Tax.
How do I pay tax on my dividends?
Dividend tax is not deducted when the dividend is paid. You report your dividends on your Self Assessment tax return and pay any tax due by 31 January after the end of the tax year.
When can my company pay a dividend?
Only when the company has enough retained profit after Corporation Tax to cover it. Each dividend should be backed by a board decision and a dividend voucher. Dividends paid without enough profit can be treated as illegal and may have to be repaid.
Can my company claim the Employment Allowance?
Only if it has at least one employee, or a second director, paid above £5,000 a year. Companies where the only employee is a sole director cannot claim it.
Should I leave profit in the company?
Often, yes. If taking more dividends would push you into the 35.75% higher rate, it can make sense to leave profit in the company, make a pension contribution or plan withdrawals over more than one tax year.
Related guides
- Sole trader vs limited company 2026/27: which pays less tax?
- Director's loan account explained: s455 tax and the rules for 2026/27
- Corporation Tax rates 2026/27: 19%, 25% and marginal relief
- Buying a car through your limited company in 2026/27
This guide is general information for the 2026/27 tax year and is not personal tax advice. Income Tax rates on salary are different in Scotland; dividend tax rates are the same across the UK. Your best mix depends on your profit, other income and plans, so speak to an accountant before you decide.
