For most owner-directors of a UK limited company, the most tax-efficient salary vs dividends 2026/27 split is a small salary of £12,570 (your full personal allowance) topped up with dividends for the rest of what you need. The salary is a deductible company expense and keeps your National Insurance record intact; the dividends are taxed more lightly than salary even after this year's rate rise. If your company has more than one employee or director, £12,570 is almost always the winner. If you're a sole director with no other staff, the maths is closer, and worth checking carefully.
The big change for 2026/27 is that dividend tax rates have risen by 2 percentage points at the ordinary and upper bands. That narrows the gap between salary and dividends, but it doesn't reverse the answer.
The 2026/27 Rates and Thresholds You Need
These are the figures that drive the whole decision this year.
| Item | 2026/27 figure |
|---|---|
| Personal allowance | £12,570 |
| Basic-rate band ends | £50,270 |
| Additional-rate threshold | £125,140 |
| Dividend allowance | £500 |
| Ordinary (basic-rate) dividend tax | 10.75% |
| Upper (higher-rate) dividend tax | 35.75% |
| Additional-rate dividend tax | 39.35% |
| Employer (secondary) NIC threshold | £5,000 |
| Employer NIC rate | 15% |
| Employment Allowance | £10,500 |
| Corporation Tax (small profits) | 19% |
The ordinary and upper dividend rates each rose by 2 points from April 2026 (previously 8.75% and 33.75%). The additional rate is unchanged at 39.35%. See HMRC's dividend tax guidance for the official rates.
Why Take a Salary First and Dividends Second?
Three reasons make a modest salary the foundation of director pay:
- It's a deductible cost. Salary reduces company profit, so it saves Corporation Tax at 19% (or 25% in the marginal band). Dividends are paid from post-tax profit, so they save nothing on the company side.
- It protects your state pension. A salary at or above the Lower Earnings Limit earns you a qualifying year towards your state pension and certain benefits, without you paying any employee NIC at this level.
- Dividends are still taxed more gently than salary. Even at 10.75%, basic-rate dividends beat the combined hit of income tax plus employee and employer NIC on the same amount of salary.
How Much Salary Should a Director Take in 2026/27?
It depends on whether your company can claim the Employment Allowance, which wipes out the first £10,500 of employer NIC.
If You Can Claim the Employment Allowance (Two or More on the Payroll)
Take a salary of £12,570, the full personal allowance. The employer NIC due on the slice above the £5,000 secondary threshold is £1,135.50, but the Employment Allowance absorbs it, so you pay nothing. The whole £12,570 is also a Corporation Tax deduction, saving the company £2,388 at 19%. This is the clear winner.
A single-director company with no other employees cannot claim the Employment Allowance; you need at least one other person earning above the secondary threshold.
If You're a Sole Director With No Other Staff
You have two sensible options:
- Salary of £5,000, exactly at the secondary threshold, so no employer NIC at all. Clean and simple, but you give up some Corporation Tax relief.
- Salary of £12,570, you'll pay £1,135.50 of employer NIC, but you also gain £1,438 more Corporation Tax relief (£7,570 extra salary × 19%). The net saving of roughly £303 usually makes £12,570 the better choice, even with the NIC bill.
For most sole directors paying 19% Corporation Tax, £12,570 still edges it. If you're in the 25% or marginal Corporation Tax band, the case for the higher salary is stronger still. Run your own figures: the difference is small enough that personal circumstances can tip it either way.
How Dividends Are Taxed on Top of Your Salary
Once the salary is set, dividends fill the rest of your target income. The order of taxation matters: your salary uses up the personal allowance first, then your £500 dividend allowance applies, then dividends are taxed at 10.75% up to the £50,270 basic-rate ceiling.
A worked example for a sole director wanting around £50,000 in 2026/27:
- Salary £12,570, covered by the personal allowance, no income tax.
- First £500 of dividends, covered by the dividend allowance, tax-free.
- Remaining ~£37,200 of dividends taxed at 10.75%, roughly £4,000 of personal tax.
Cross into the higher-rate band and every extra pound of dividend is taxed at 35.75%, so think carefully before drawing above £50,270. Leaving profit in the company, making pension contributions, and spreading dividends to a spouse who is a genuine shareholder are all worth exploring.
Plug your own target into our dividend tax calculator to see the exact personal tax before you vote a dividend.
Common Salary vs Dividends Pitfalls That Catch Directors Out
- No retained profit, no dividend. Dividends can only be paid from accumulated post-tax profit. Pay one when there are no distributable reserves and it's an illegal dividend that HMRC can reclassify as salary or a loan.
- No paperwork. Each dividend needs a board minute and a dividend voucher, dated before the money moves. Backdating is not allowed.
- Forgetting the company side. A dividend strategy only works once Corporation Tax has been paid on the profit. The headline 10.75% sits on top of the 19% the company paid.
- Drifting over £50,270 by accident. The jump from 10.75% to 35.75% is steep. Track your cumulative drawings through the year.
Frequently Asked Questions
Are dividends still better than salary in 2026/27?
Yes, for the slice above your salary. Even after the rise to 10.75%, basic-rate dividends are taxed far less than salary once you add employer and employee NIC to the salary side. The 2026/27 increase narrows the gap but doesn't close it.
Do I pay National Insurance on dividends?
No. Dividends are never subject to National Insurance, which is a large part of why the salary-plus-dividends model works. They carry dividend tax instead, after your £500 dividend allowance.
Can a single-director company claim the Employment Allowance?
No. A company whose only employee earning above the secondary threshold is the sole director cannot claim the £10,500 Employment Allowance. You need at least one other employee or director paid above £5,000.
How much can I take before paying higher-rate tax?
Total taxable income up to £50,270 stays in the basic-rate band for 2026/27. With a £12,570 salary, that leaves around £37,700 of dividends (including the £500 allowance) before the 35.75% upper rate begins.
Book a free Tax Health Check →
Get the Split Right for Your Company
The right salary and dividend mix depends on your shareholders, your other income, and whether you can claim the Employment Allowance, and the 2026/27 rate changes make it worth a fresh look rather than repeating last year's numbers. If you'd like us to model your optimal director pay and handle the paperwork, get in touch with Zmartly and we'll run the figures for you. More quick answers are on our FAQ page.
