If you run your own limited company, you get to choose how you pay yourself. Most director-shareholders take a small salary plus dividends, and the exact split changes how much tax you and your company pay.
This guide shows you how to work that split out for the 2026/27 tax year. We'll cover the rates that matter, a fully worked illustrative example, and a simple decision process you can follow.
It's written for limited company owners and contractors who want the logic behind the numbers, not just a single "optimal" figure plucked from the air. If you'd rather see your own result in seconds, you can run the figures through our calculators as you read.
A quick note: this guide covers England, Wales and Northern Ireland. Scotland sets its own Income Tax rates and bands, so Scottish-resident directors should treat the salary side differently.
<h2 id="why-the-split-matters">Why does the salary and dividend split matter?</h2>
Salary and dividends are taxed in completely different ways, and they hit your company differently too.
Salary is a business expense. It reduces your company's taxable profit, so it saves Corporation Tax. It can also attract employer's and employee's National Insurance, and it counts towards your State Pension record.
Dividends are paid out of post-tax profit. Your company has already paid Corporation Tax on that money, so a dividend gives no further Corporation Tax relief. But dividends carry no National Insurance, and the dividend tax rates are lower than the equivalent Income Tax rates.
Get the balance right and you keep more of what your company earns. Get it wrong and you either overpay tax or miss out on a qualifying year for your State Pension. That's the whole game.
<h2 id="rates-2026-27">Which rates and thresholds apply for 2026/27?</h2>
Here are the figures that drive the calculation. Every number below is for the 2026/27 tax year unless stated.
| Item | 2026/27 figure |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate band (taxable income above the allowance) | up to £37,700 |
| Higher rate threshold (total income) | £50,271 |
| Additional rate threshold | over £125,140 |
| NIC Primary Threshold (employee) | £12,570 |
| NIC Secondary Threshold (employer) | £5,000 |
| Employer's NIC rate above the Secondary Threshold | 15% |
| Dividend allowance | £500 |
| Dividend basic rate | 10.75% |
| Dividend higher rate | 35.75% |
| Dividend additional rate | 39.35% |
| Corporation Tax small profits rate (profits up to £50,000) | 19% |
Two things stand out for 2026/27.
First, the dividend rates went up. The basic rate is now 10.75% and the higher rate 35.75%, both a percentage point above where they sat in 2025/26. That makes the salary side slightly more attractive than it was, but the broad strategy is unchanged.
Second, the dividend allowance stays at just £500. Only your first £500 of dividends is tax-free, so it doesn't shelter much.
<h2 id="what-salary">What salary should a director take in 2026/27?</h2>
For most director-shareholders, the sweet spot for salary is up to the Personal Allowance of £12,570.
At a salary of £12,570 you pay no Income Tax (it's all within the Personal Allowance) and no employee's National Insurance (the Primary Threshold is also £12,570, so nothing is charged above it). The salary is fully deductible against Corporation Tax at 19% for a company with profits up to £50,000.
The one cost to watch is employer's National Insurance. The Secondary Threshold is £5,000, so employer's NIC at 15% applies to salary above that level. On a £12,570 salary that's 15% of £7,570, which comes to £1,135.50.
Many companies wipe out that employer's NIC with the Employment Allowance. But there's a catch that trips up a lot of one-person companies: a limited company cannot claim the Employment Allowance if its only employee paid above the Secondary Threshold is also a director. So a sole director with no other staff usually can't claim it.
Does that change the recommendation? Not really, and here's why. Even when a single director pays the £1,135.50 of employer's NIC out of pocket, the Corporation Tax relief on the salary plus that NIC is worth more than the NIC itself, and the salary still buys a qualifying year towards the State Pension. We show the maths in the example below.
If you genuinely want to avoid all employer's NIC, you can cap the salary at the £5,000 Secondary Threshold instead. The trade-off is that £5,000 is below the Lower Earnings Limit, so that year may not count towards your State Pension. For most directors, that's a poor swap.
<h2 id="worked-example">Illustrative example: a £50,000 director package</h2>
Illustrative example. Meet Tomas, the sole director and only employee of a profitable consultancy company in Leeds. The company's profits are comfortably under £50,000, so it pays Corporation Tax at 19%. Tomas wants to draw around £50,000 from the company in 2026/27 and has no other income. He can't claim the Employment Allowance because he's the only person on the payroll.
Tomas takes a salary of £12,570 and the rest as dividends.
Step 1: the salary.
- Salary: £12,570
- Income Tax on the salary: £0 (within the £12,570 Personal Allowance)
- Employee's NIC: £0 (Primary Threshold is £12,570)
- Employer's NIC: 15% of (£12,570 - £5,000) = 15% of £7,570 = £1,135.50
Step 2: the dividends.
Tomas takes £37,430 in dividends to bring his total income to £50,000.
- His Personal Allowance is fully used by the salary, so all £37,430 of dividends is taxable.
- First £500 is covered by the dividend allowance, taxed at 0%.
- The remaining £36,930 sits within the basic rate band, taxed at 10.75%.
- Dividend tax: £36,930 x 10.75% = £3,969.98
Step 3: the company's Corporation Tax relief on the salary.
The salary and the employer's NIC are both deductible. Relief is 19% of (£12,570 + £1,135.50) = 19% of £13,705.50 = £2,604.05 of Corporation Tax saved.
Why not just take a £5,000 salary to dodge the employer's NIC?
It's tempting, but it costs Tomas more overall. Take the slice of pay between a £5,000 salary and a £12,570 salary. As salary, that £7,570 costs the company £1,135.50 in employer's NIC, so the total pre-tax outlay is £8,705.50. To compare like with like, the dividend column delivers that same £8,705.50 of pre-tax profit to Tomas instead:
| Delivering £8,705.50 of pre-tax profit | As salary | As dividend |
|---|---|---|
| Salary delivered to Tomas | £7,570.00 | £0 |
| Employer's NIC | £1,135.50 | £0 |
| Corporation Tax relief on the cost | -£1,654.05 | £0 |
| Corporation Tax suffered on the profit | £0 | £1,654.05 |
| Distributable dividend | £0 | £7,051.45 |
| Dividend tax for Tomas | £0 | £758.03 |
| What Tomas keeps in hand | £7,570.00 | £6,293.42 |
Paying that slice as salary leaves Tomas with the full £7,570 in his pocket, because the salary and employer's NIC are deductible and there is no Income Tax or employee's NIC on it in this band. Paying the same £8,705.50 as a dividend means the company first loses £1,654.05 to Corporation Tax, then Tomas pays £758.03 of dividend tax on what's left, so he keeps £6,293.42, about £1,277 less, and secures no State Pension credit. The salary route wins on both counts.
The takeaway: for a 2026/27 basic-rate director, a salary up to £12,570 plus dividends is usually the most tax-efficient split, even when the Employment Allowance isn't available.
Numbers change once your total income pushes into the higher rate band, where dividends are taxed at 35.75%. At that point the planning gets more involved, and pension contributions often do more for you than tweaking the split. That's worth a proper conversation with an accountant.
<h2 id="decision-steps">How do you decide your own split? A 5-step method</h2>
You can run your own version of the calculation above in five steps.
- Set the salary first. For most directors, start at £12,570. Drop to the £5,000 Secondary Threshold only if you have a specific reason to avoid all employer's NIC and don't need the State Pension credit.
- Check the Employment Allowance. If you have a second employee or director paid above the £5,000 Secondary Threshold, you can likely claim the £10,500 allowance, which often removes the employer's NIC entirely. A sole director can't.
- Work out how much income you actually need. Only declare the dividends you need to live on and meet your goals. Profit you leave in the company isn't taxed on you personally until you draw it.
- Layer the dividends on top. Use the £500 dividend allowance, then the 10.75% basic rate up to the £50,271 higher rate threshold, and be deliberate about crossing into the 35.75% band.
- Sense-check the Corporation Tax. Remember dividends come from post-tax profit, so the company has already paid Corporation Tax (19% on profits up to £50,000) on that money.
Want to skip the spreadsheet? Run the numbers through our dividend tax calculator and take-home pay calculator to see your split and your net pay side by side.
<h2 id="common-mistakes">What are the common mistakes we see?</h2>
In practice, the same handful of errors come up again and again.
Declaring dividends with no profit to back them. A dividend is only legal if the company has enough distributable reserves. An "illegal" dividend can be reclassified, sometimes as a director's loan, which brings its own tax charge.
Forgetting the paperwork. Each dividend needs a board minute and a dividend voucher. HMRC can challenge dividends that look like disguised salary if the records aren't there.
Assuming the Employment Allowance applies. As above, sole-director companies usually can't claim it. Budgeting as though you can leaves a gap.
Setting the salary once and never revisiting it. Thresholds and dividend rates move. The 2026/27 dividend rate rise is a good example, so it's worth a yearly check.
If you want a second pair of eyes on any of this, our corporation tax services and tax advisory team handle exactly these decisions for limited companies and contractors every day.
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Want to make sure you're not leaving money on the table in 2026/27? Book a free 20-minute call with a Zmartly accountant and we'll work out the right salary and dividend split for your company. Talk to a Zmartly accountant.
<h2 id="faqs">FAQs</h2>
Is it better to take salary or dividends in 2026/27?
For most director-shareholders, a blend is best: a salary up to the £12,570 Personal Allowance plus dividends on top. The salary saves Corporation Tax and protects your State Pension record, while dividends carry no National Insurance and are taxed at lower rates than salary.
What is the most tax-efficient salary for a director in 2026/27?
For most directors it's £12,570, which matches both the Personal Allowance and the NIC Primary Threshold. You pay no Income Tax or employee's NIC on it. A sole director with no other staff pays employer's NIC of £1,135.50 because they can't claim the Employment Allowance, but the Corporation Tax relief still makes this the better choice for most.
How much tax do I pay on dividends in 2026/27?
The first £500 is tax-free under the dividend allowance. Above that, dividends are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. The rate depends on your total income, not just your dividends.
Can a single-director company claim the Employment Allowance?
Usually not. A limited company can't claim the Employment Allowance if its only employee paid above the £5,000 Secondary Threshold is also a director. You typically need a second employee or director paid above that threshold to qualify.
Do dividends count towards my State Pension?
No. Dividends carry no National Insurance, so they don't build your State Pension record. That's a key reason to take a salary at least up to the Lower Earnings Limit, which a £12,570 salary clears comfortably.
<h2 id="sources">Sources</h2>
- Income Tax rates and Personal Allowances (gov.uk)
- Income Tax rates and allowances: current and past (gov.uk)
- Rates and thresholds for employers (gov.uk)
- Tax on dividends (gov.uk)
- Corporation Tax rates (gov.uk)
- Claim the Employment Allowance (gov.uk)
- Single-director companies and Employment Allowance (gov.uk)
