The most tax-efficient way to pay yourself from a limited company usually comes down to one combination: a small salary plus dividends. You run a modest salary through PAYE (typically up to £12,570 for 2026/27) to use your personal allowance and protect your State Pension record, then draw the rest as dividends from post-tax company profit. This almost always beats taking a high salary alone, because dividends carry no National Insurance and are taxed at lower rates.
This guide works through the numbers for the 2026/27 tax year, shows you the optimum split, and flags the traps that catch first-time directors.
Why Salary Plus Dividends Beats a Big Salary
A salary is a business expense, so it reduces your company's Corporation Tax bill. But salary is hit by income tax and two layers of National Insurance, yours and the company's. Dividends are paid from profit the company has already paid Corporation Tax on, so they don't reduce Corporation Tax, but they carry no National Insurance and are taxed at lower rates.
For most owner-managed companies, a low salary up to the personal allowance plus dividends gives the lowest overall tax bill. You can read more about how this fits the wider picture on our limited company accounting page.
How Much Salary Should a Director Take in 2026/27?
There are two common salary levels, and the right one depends on whether your company can claim the Employment Allowance.
| Salary level | Annual amount | Best when |
|---|---|---|
| Up to the Secondary Threshold | £5,000 | You're the sole employee/director and can't claim Employment Allowance |
| Up to the Personal Allowance | £12,570 | You have other employees and can claim the £10,500 Employment Allowance |
The key 2026/27 thresholds:
- Personal allowance: £12,570 (no income tax below this)
- Primary NIC threshold: £12,570 (you pay no employee NIC below this)
- Secondary (employer) NIC threshold: £5,000, the company pays 15% employer NIC on salary above this
- Employment Allowance: £10,500 (offsets employer NIC, but a single-director company with no other employees can't claim it)
The Single-Director Scenario
If you're the only person on the payroll, a salary of £12,570 triggers employer NIC of 15% on the £7,570 above the £5,000 threshold, about £1,136. Many sole directors still take the full £12,570 because the Corporation Tax saved on the extra salary usually outweighs that NIC. Others keep salary at £5,000 to avoid payroll NIC entirely. The difference is small, and we model both for clients.
The Multi-Director or Multi-Employee Scenario
If your company has at least two people earning above the Secondary Threshold, you can usually claim the £10,500 Employment Allowance. That wipes out the employer NIC, so paying each director the full £12,570 becomes the clear winner.
Any salary at or above £6,708 (the Lower Earnings Level) also gives you a qualifying year towards your State Pension without paying a penny in NIC.
How Dividends Are Taxed in 2026/27
Dividend tax rates increased from 6 April 2026. Everyone gets a £500 tax-free dividend allowance first. Above that, dividends are taxed by band:
| Band | Income range (2026/27) | Dividend tax rate |
|---|---|---|
| Dividend allowance | First £500 | 0% |
| Basic rate | Up to £50,270 | 10.75% |
| Higher rate | £50,270 to £125,140 | 35.75% |
| Additional rate | Over £125,140 | 39.35% |
Your dividend tax band is worked out by stacking dividends on top of your other income, including salary. HMRC's official guidance is at Tax on dividends.
A Worked Example: Salary Plus £40,000 in Dividends
Take a sole director with a £12,570 salary who draws £40,000 in dividends:
- Salary of £12,570 uses the personal allowance, £0 income tax
- First £500 of dividends, £0 (dividend allowance)
- Remaining £39,500 of dividends sits in the basic-rate band, taxed at 10.75%, about £4,246
That's roughly £4,246 of personal tax on £52,570 drawn. A pure £52,570 salary would cost far more once income tax and both NICs are added.
The Rules You Must Follow to Pay Dividends Legally
Dividends aren't a tap you turn at will. To stay compliant:
- Only pay from profit. Dividends must come from retained, post-Corporation-Tax profit. Paying when there's no profit creates an illegal dividend HMRC can reclassify.
- Hold a board meeting and keep minutes, even if you're the only director.
- Issue a dividend voucher for each payment showing the date, company name, and amount.
- Keep salary on a real-time PAYE scheme reported to HMRC each pay run.
Mixing personal and company money loosely is one of the most common errors we fix, see our FAQ for more on directors' loan accounts and what counts as drawings.
Don't Forget Corporation Tax and VAT
Your dividends depend on profit after Corporation Tax, so plan that first. And if your turnover crosses the £90,000 VAT registration threshold, you must register for VAT, this doesn't change your pay strategy directly, but it affects the cash in the business.
Frequently Asked Questions
Can I just take all my money as dividends?
No. Dividends can only be paid from available profit after Corporation Tax. If the company hasn't made enough profit, any "dividend" is treated as an illegal distribution or a directors' loan, which can trigger extra tax. A small salary alongside dividends is almost always the safer, more tax-efficient route.
Do I pay National Insurance on dividends?
No, dividends carry no National Insurance at all, for you or the company. That's the main reason the low-salary-plus-dividends model is so tax-efficient. National Insurance only applies to salary above the relevant thresholds.
Do I need to register for PAYE to pay myself a salary?
Yes, where your salary reaches the level that must be reported. Even a low director's salary should normally run through a registered PAYE scheme and be reported to HMRC in real time, so the year counts towards your State Pension and the salary stays a valid deduction.
Is £12,570 always the best salary?
Not always. £12,570 suits companies that can claim the £10,500 Employment Allowance. A sole director with no other staff can't claim it, so paying £12,570 triggers some employer NIC, though the Corporation Tax saving often still makes it worthwhile. The optimum depends on your exact circumstances.
Getting the salary and dividend split right can save you four figures a year, and the 2026/27 dividend rate rise makes the planning matter more than ever. If you'd like us to model the optimum mix for your company and handle the payroll, dividend paperwork and tax filings, get in touch with Zmartly for a free, no-obligation review.
