Director's salary vs dividends: the 2026/27 split

If you run a small UK limited company, how you pay yourself, salary, dividends, or a mix, has a real effect on your tax bill. For 2026/27 the maths has shifted again: dividend tax rates went up in April, but the core strategy still holds. Here's a plain-English look at the options and how directors typically choose.

Why directors usually take a low salary plus dividends

A small salary at or above the Lower Earnings Limit (£6,708 for 2026/27) keeps your National Insurance record ticking over and is usually a deductible cost for the company. Dividends are paid from post-tax profit and carry no National Insurance, so a low salary topped up with dividends is generally more efficient than a large salary alone. The art is choosing the salary level.

The numbers that drive the decision (2026/27)

Note the dividend rates: from 6 April 2026 the basic and higher rates rose by two points, to 10.75% and 35.75%. The additional rate is unchanged at 39.35%. That makes dividends a little more expensive than before, but they still beat the combined NI cost of extra salary for most people.

The two common salary levels

Two salary figures dominate the planning:

• £12,570 (the Personal Allowance). If your company can claim the Employment Allowance, this is usually the sweet spot. The salary is covered by your tax-free allowance, employer NI above the £5,000 Secondary Threshold is mopped up by the Employment Allowance, and the higher salary is a larger deduction against Corporation Tax.
• £5,000 (the Secondary Threshold). If your company can't claim the Employment Allowance, most commonly a single-director company with no other employees, keeping salary at £5,000 avoids employer NI altogether. The catch is that £5,000 is below the Lower Earnings Limit (£6,708 for 2026/27), so it doesn't give you a qualifying year for your State Pension. A salary from £6,708 up to £12,570 does, with no employee NI, but the company pays 15% employer NI on the part above £5,000: about £256 at £6,708.

The Employment Allowance is the pivot. A sole director with no staff generally can't claim it, so the choice for them is usually between £5,000 (no NI at all, but no qualifying year) and a salary at or just above £6,708 (a qualifying year for a small employer NI bill). A company that can claim the allowance can usually go to £12,570.

Then top up with dividends

Above the salary, directors typically draw dividends up to the point that suits their personal tax position, often up to the top of the basic-rate band (£50,270 of total income) to stay in the 10.75% dividend bracket, then deciding case by case whether higher-rate dividends at 35.75% are worth taking. Dividends must be paid from genuine retained profit after Corporation Tax, with proper board minutes and vouchers.

Don't forget the company side

Salary reduces the company's profit (and therefore Corporation Tax); dividends don't. So the "best" split isn't only about your personal tax, it depends on your Corporation Tax rate, whether you can claim the Employment Allowance, and what other income you have. This is why a quick review with someone who can see the whole picture usually pays for itself.

Short FAQ

Will a £12,570 salary create a tax bill for me personally? Not on the salary itself, as long as your Personal Allowance isn't used up by other income. £12,570 a year is exactly the Primary Threshold, and employee NI only starts above it, so there's no employee NI either. The cost sits with the company: 15% employer NI on the £7,570 above £5,000, which is £1,135.50, and the Employment Allowance covers it if you can claim it.

Do I need to file a Self Assessment return? It depends on your dividends. Over £10,000 in a tax year, you'll need to file a return. Up to £10,000, if you don't already file one, you can tell HMRC after the tax year ends and before 5 October, and ask them to collect the tax through your tax code instead. Dividends within the £500 dividend allowance don't need reporting at all. Other income can still mean a return, so check your whole position. See our first Self Assessment guide.

Can I change the split mid-year? Yes, within reason, but salary changes must be run through payroll correctly and dividends must be supported by profit and paperwork.

This guide is general information, not tax advice, and reflects our understanding of the rules and 2026/27 rates as at June 2026. The right split depends on your full circumstances, please get specific advice before acting.