Dividends vs salary. For most owner-managed limited company directors, the most tax-efficient remuneration strategy in 2026/27 will usually be:
A salary up to £12,570 combined with dividends, adjusted depending on other income, National Insurance position, Employment Allowance eligibility, and company profits.
However, the optimal split depends on your specific circumstances.
This guide explains how to structure your pay in the 2026/27 tax year to minimise personal and corporation tax while remaining compliant.
Taxes Directors Need to Consider
When deciding how to pay yourself, you must consider:
- Income Tax
- Dividend Tax
- Employee and Employer National Insurance (NI)
- Corporation Tax
Each interacts differently depending on salary level and company profits.
Income Tax 2026/27
For most directors in England and Wales:
- Personal Allowance: £12,570 (tax-free if total income is below £100,000)
- Basic Rate Band: £12,571 – £50,270 (20%)
- Higher Rate: £50,271 – £125,140 (40%)
- Additional Rate: Over £125,140 (45%)
If you have no other income, a salary up to £12,570 can be taken without paying income tax.
Dividend Tax 2026/27
From 6 April 2026, dividend tax rates are:
- £500 Dividend Allowance (tax free)
- 10.75% – Basic rate band
- 35.25% – Higher rate band
- 39.35% – Additional rate band
Dividends:
- Do not attract National Insurance
- Must be paid from distributable profits
- Are taxed after corporation tax has already been paid
National Insurance 2026/27
| Annual Salary | Employee NI | Employer NI | NI Credit? |
|---|---|---|---|
| £5,000 | Nil | Nil | No |
| £5,001 – £6,499 | Nil | 15% | No |
| £6,500 – £12,570 | Nil | 15% | Yes |
| £12,571 – £50,270 | 8% | 15% | Yes |
| £50,271+ | 2% | 15% | Yes |
Employer NI is currently 15%.
Employment Allowance
Eligible companies can reduce their employer NI bill by up to £10,000 per year.
However:
- Single-director companies with no other employees do not qualify.
- You must have at least one additional employee earning over £416.67 per month.
If you qualify and still have allowance available, a higher salary may become more tax efficient.
What Salary Should a Director Take in 2026/27?
The correct salary depends on your situation.
Option 1: £5,000 Salary
Suitable if:
- You have other employment or pension income
- You already have 35 qualifying NI years
- You are not eligible for Employment Allowance
- Company profits are under £50,000
✔ No employer NI
✔ No employee NI
✖ No NI credit
✖ Limited corporation tax relief
This is the ultra-low salary strategy.
Option 2: £6,500 Salary
Suitable if:
- You need NI credits for state pension
- You have other income
- You are not eligible for Employment Allowance
You would pay:
- Employer NI of approximately £225
However, the company receives corporation tax relief on both the salary and the employer NI.
This is often a good compromise where NI credits are needed.
Option 3: £12,570 Salary (Most Common Strategy)
Suitable if:
- You have no other income
- You need NI credits
- You are not eligible for Employment Allowance
You may pay:
- Employer NI of approximately £1,135.50
However:
- No income tax
- No employee NI
- Full NI credit
- Corporation tax relief on salary and employer NI
For most directors without other income, this is the most balanced approach.
Option 4: Higher Salary (With Employment Allowance)
If:
- You qualify for Employment Allowance
- The allowance is not fully used
- Company profits exceed £50,000
A higher salary can reduce corporation tax efficiently without triggering employer NI (up to the allowance limit).
This can be beneficial for companies paying corporation tax at 25%.
Topping Up With Dividends
A salary alone is rarely enough.
Dividends are usually used to:
- Extract additional profit
- Avoid National Insurance
- Maintain flexibility over timing
Dividends must:
- Be supported by sufficient distributable profits
- Be properly declared and minuted
- Be paid proportionately to shareholders
Example: Director Taking £12,570 Salary
Assuming no other income (England/Wales):
| Dividends | Personal Tax |
|---|---|
| £10,000 | £1,021.25 |
| £20,000 | £2,096.25 |
| £30,000 | £3,171.25 |
| £37,700 | £3,999.00 |
| £50,000 | £8,511.00 |
| £60,000 | £12,036.00 |
These figures assume:
- £12,570 salary
- £500 dividend allowance
- Standard UK tax bands
Important Trap
Dividends can only be paid from profits.
If your company does not have sufficient distributable reserves, a high dividend strategy is not possible.
Need Help Deciding Your 2026/27 Remuneration?
Every director’s situation is different.
A tailored review can help you:
- Reduce tax
- Protect your state pension record
- Optimise corporation tax
- Plan for future growth
If you would like advice specific to your business, please get in touch to arrange a remuneration review.
JLA Accounting Limited takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss for anyone acting from or refraining from acting as a result of this information can be accepted by JLA Accounting Limited.
PS. Have you seen our latest blog on “Making Tax Digital”? Read it here
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