Salary vs Dividends 2026/27: How UK Directors Should Pay Themselves
As a UK limited company director, you have more flexibility than a regular employee when it comes to paying yourself. Most directors use a combination of salary and dividends — not one or the other — because it tends to be the most tax-efficient approach.
2026/27 Update: Dividend Tax Rose
Following the Autumn Budget 2025, dividend tax rates increased by 2 percentage points from 6 April 2026: basic rate rose from 8.75% to 10.75%, higher rate from 33.75% to 35.75%. The additional rate (39.35%) and the £500 dividend allowance are unchanged. Personal Allowance, Primary Threshold and Upper Earnings Limit are frozen until April 2031.
How Salary Is Taxed in 2026/27
A salary is money your company pays you as an employee. As a director, you're also an employee of your own company, which means salary payments attract the same taxes as any other employee.
Salary Taxes
- • Income Tax: 0% up to £12,570, then 20%, 40%, or 45%
- • Employee NI: 8% above £12,570
- • Employer NI: 15% above £5,000
The Upside
Salary is a company expense, which reduces your Corporation Tax bill. At 25% CT, a £1,000 salary costs only £750 net to the company (before NI).
The challenge with salary is the combined tax burden. Once you exceed the Personal Allowance (£12,570), you pay Income Tax, and above the Primary Threshold, you pay employee NI. Your company also pays employer NI on salary above £5,000. These costs add up quickly, which is why taking a large salary becomes inefficient.
How Dividends Are Taxed in 2026/27
Dividends are distributions of company profits to shareholders. Unlike salary, dividends are not a business expense — they're paid from profits that have already been taxed through Corporation Tax.
Dividend Tax Rates for 2026/27
| Income Band | Dividend Tax Rate |
|---|---|
| First £500 (Dividend Allowance) | 0% |
| Basic rate (£12,571 – £50,270) | 10.75% |
| Higher rate (£50,271 – £125,140) | 35.75% |
| Additional rate (over £125,140) | 39.35% |
The key advantage of dividends: no National Insurance. Neither you nor your company pays NI on dividend income. This is the primary reason why a salary + dividends combination often works out better than salary alone.
The trade-off is that dividends come from post-Corporation Tax profits. If your company has no profit, you cannot legally pay dividends. And the profit you distribute has already faced a 19% or 25% CT charge.
Why Most Directors Use a Mix
The typical approach is to pay yourself a modest salary, then top up with dividends. This strategy works because:
- 1.A low salary avoids most NI — At £6,708 (the Lower Earnings Limit), you pay no employee NI and only £256 in employer NI.
- 2.Dividends fill the gap efficiently — The 10.75% basic rate dividend tax is still lower than the combined 28% (20% Income Tax + 8% employee NI) you'd pay on additional salary.
- 3.The salary still counts — Even a small salary can preserve State Pension credits and provide a foundation for mortgage applications.
The "optimal" salary figure depends on your circumstances, but £6,708 and £12,570 are the two most commonly discussed levels. The right choice depends on factors like Employment Allowance eligibility and whether you have other income.
Illustrative Comparison
To show why the combination matters, consider a director extracting £40,000 from their company:
Option A: All Salary
- • Employer NI: £5,250 (15% on £35,000)
- • Employee NI: £2,194 (8% on £27,430)
- • Income Tax: £5,486 (20% on £27,430)
- Total tax cost: ~£12,930
Option B: £6,708 Salary + Dividends
- • Employer NI: £256 (15% on £1,708)
- • Employee NI: £0
- • Income Tax on salary: £0
- • CT on dividend profit: ~£11,097
- • Dividend tax: ~£2,895 (10.75% on £26,930)
- Total tax cost: ~£14,248
At first glance, the all-salary option looks cheaper. But the salary option's Corporation Tax saving (the company deducts salary as an expense) needs to be factored in. When you account for the CT saved on salary, the salary + dividends approach typically comes out ahead — especially at higher extraction levels where NI compounds.
These figures are simplified for illustration. The actual outcome depends on your company's profit level, your other income, and whether you qualify for Employment Allowance.
When Salary Can Make More Sense
The salary + dividends combination isn't always the right answer. There are situations where a higher salary makes sense:
Pension Contributions
Salary forms the basis for personal pension contributions. If you want to maximise your pension allowance, you may need a higher salary — though employer pension contributions offer another route.
Employment Allowance
Companies eligible for Employment Allowance can offset up to £10,500 of employer NI. If you qualify, a salary up to £12,570 may cost nothing extra in employer NI.
Mortgage Applications
Some lenders weight salary more heavily than dividends when assessing affordability. If you're planning to apply for a mortgage, a higher salary on your payslip may help.
State Pension Qualifying Years
You need 35 qualifying years for a full State Pension. A salary at or above the Lower Earnings Limit (£6,708) ensures you build a qualifying year without paying NI.
Common Mistakes Directors Make
- ✗Taking everything as salary — Some directors pay themselves a large salary for simplicity, not realising they're paying thousands more in NI than necessary.
- ✗Paying too little salary for years — A salary below £6,708 means you don't build State Pension credits. Over time, this could cost more than the NI you saved.
- ✗Treating dividends like a monthly wage — Dividends must come from available profits. Paying dividends when profits don't exist is illegal and creates tax problems.
- ✗Ignoring tax band interactions — Your salary and dividends both count as income. Pushing into a higher tax band can make dividends more expensive than expected.
Key Takeaways for 2026/27
For most UK limited company directors, a combination of low salary and dividends remains the most tax-efficient extraction method in 2026/27. The fundamentals haven't changed:
- • Salary attracts NI; dividends do not
- • A salary around £6,708 preserves State Pension credits at minimal cost
- • Directors with Employment Allowance may benefit from a higher salary
- • The best balance depends on your specific circumstances
Understanding the mechanics helps you make informed decisions. But the right answer for you depends on your company's profits, your other income, your pension plans, and your personal goals. Use tools like our calculator to explore your options, but consider speaking to an accountant for tailored advice.
Sources
Note: This guide is based on projected 2026/27 thresholds and current dividend tax rates. Official rates are typically confirmed in the Autumn Budget preceding the tax year. Individual circumstances vary — consider seeking professional advice for your specific situation.