If you run your own limited company, one of the most common questions we hear from directors is a deceptively simple one: how should I actually pay myself? The answer changed again on 6 April 2026, when dividend tax rates rose for basic and higher rate taxpayers, and it depends heavily on whether your company has other employees, how much profit it makes, and how close your total income sits to certain key thresholds.
Disclaimer: This article is for general information only and reflects tax rates, allowances and thresholds confirmed for the 2026/27 tax year at the time of writing. Every director's circumstances are different. Always seek specific advice tailored to your own position before setting your salary and dividend arrangements.
This article sets out how salary and dividends are actually taxed, the key thresholds that shape the decision for 2026/27, and worked examples covering both a sole director company and a company that employs staff.
Why Salary and Dividends Are Taxed So Differently
The reason this question exists at all is that salary and dividends sit in completely different tax systems. A salary is a deductible business expense. It reduces the company's profit before Corporation Tax is calculated, and it also attracts employee and employer National Insurance once it passes certain thresholds. A dividend, by contrast, is a distribution of profit that has already been subject to Corporation Tax. It carries no National Insurance liability for either the company or the director, but the rates of dividend tax paid personally are calculated separately from salary income.
This difference is precisely why most director shareholders use a mix of the two rather than taking everything as salary or everything as dividends. A modest salary secures a qualifying year for the State Pension and reduces the company's Corporation Tax bill, while dividends make up the balance of income in a way that avoids National Insurance altogether.
The Thresholds That Matter for 2026/27
Several figures drive this decision each year, and two of them changed in April 2026.
The Personal Allowance remains £12,570, unchanged and frozen for several years now. This is the amount of income you can receive before Income Tax applies, and it also happens to align with the Primary Threshold, the point at which employee National Insurance starts being deducted from a salary.
The Secondary Threshold, the point above which the company starts paying employer National Insurance on a salary, is £5,000 for 2026/27, charged at 15% on everything above it. This threshold is considerably lower than it was a few years ago, which has made the employer NI cost of a full Personal Allowance salary more significant than it once was.
The Lower Earnings Limit is £6,708 for 2026/27. A salary at or above this level earns a qualifying year towards the State Pension, even though it sits below the point at which any Income Tax or employee NI becomes due.
The Employment Allowance remains £10,500 for 2026/27, but it is not available to every company. A company where the only employee paid above the Secondary Threshold is also a director cannot claim it. This single rule is the biggest factor separating the optimal strategy for a sole director company from the optimal strategy for a company with other staff on the payroll.
On the dividend side, the dividend allowance remains £500 for 2026/27. Above that, dividend tax is charged at 10.75% within the basic rate band, up from 8.75% in 2025/26, at 35.75% within the higher rate band, up from 33.75%, and at 39.35% for additional rate taxpayers, unchanged. This two percentage point rise, confirmed at the Autumn 2025 Budget, is the single biggest change affecting profit extraction for 2026/27, and it is covered in more detail in our dividend tax hike guide.
Option One: Salary at the Lower Earnings Limit
For many years, a popular approach for sole director companies was to set salary at the Lower Earnings Limit, currently £6,708, and extract the rest of the director's income as dividends. This secures a State Pension qualifying year at a very small employer National Insurance cost, since only the amount between £5,000 and £6,708 attracts the 15% employer rate.
The attraction of this approach is simplicity and a very small NI cost. The drawback is that it leaves a large part of the Personal Allowance, £5,862 in this case, unused against salary, and it forgoes some Corporation Tax relief that a higher salary would generate.
Option Two: Salary at the Personal Allowance
The alternative is to set salary at £12,570, using the full Personal Allowance so that no Income Tax is due on the salary itself, while accepting a larger employer National Insurance cost on the portion between £5,000 and £12,570.
For most sole director companies, this option tends to produce a better net outcome than the Lower Earnings Limit approach, because the additional Corporation Tax relief generated by the larger salary usually outweighs the extra employer National Insurance paid. How much better depends on your company's Corporation Tax rate, since the value of the relief rises with the rate at which profits would otherwise be taxed.
Worked Example 1: Comparing the Two Salary Options
Bramwell Tech Ltd is a sole director company owned and run by Tom, with no other employees. The company has profit of £45,000 before the director's pay is taken into account, and pays Corporation Tax at the small profits rate of 19%, since its profit sits below the £50,000 threshold.
Under Option A, Tom takes a salary of £6,708. Employer National Insurance on this is £256, calculated on the £1,708 above the Secondary Threshold. After deducting the salary and NI cost, the company has £38,036 of profit remaining, on which Corporation Tax of £7,227 is due, leaving £30,809 available to distribute as a dividend. After the dividend allowance and Tom's remaining, unused Personal Allowance shelter part of that dividend, the remainder is taxed at the basic dividend rate of 10.75%. Tom's total net income from salary and dividend combined comes to approximately £34,889.
Under Option B, Tom takes a salary of £12,570. Employer National Insurance on this is £1,136. After deducting the larger salary and NI cost, the company has £31,295 of profit remaining, on which Corporation Tax of £5,946 is due, leaving £25,349 available to distribute as a dividend. Because Tom's Personal Allowance is now fully used against salary, none of it is available to shelter the dividend, but after the £500 dividend allowance the remainder is still taxed entirely at the basic dividend rate. Tom's total net income from salary and dividend combined comes to approximately £35,247.
In this example, Option B leaves Tom around £358 better off overall, despite the higher employer National Insurance cost, because the extra Corporation Tax relief on the larger salary more than compensates for it. The gap between the two options widens further for companies paying Corporation Tax at the main rate of 25%, since the relief on each additional pound of salary is worth more at higher Corporation Tax rates.
When the Employment Allowance Changes the Answer
Everything above assumes a sole director company, which cannot claim the Employment Allowance. If your company employs other staff and is eligible to claim it, the calculation changes substantially, because up to £10,500 of employer National Insurance across your whole payroll, potentially including the director's own salary, is simply written off.
Worked Example 2: A Company With Employees
Iqbal Build Services Ltd employs four tradespeople alongside its director, Farhan. The combined employer National Insurance liability across the whole payroll, including a director's salary set at £12,570, comes to around £6,800 for the year, comfortably within the £10,500 Employment Allowance. Because the allowance absorbs this cost entirely, Farhan effectively takes his salary with no employer National Insurance cost to the company at all, while still generating the full Corporation Tax relief on that salary.
This is why sole director companies and companies with employees genuinely need different advice. Where headroom remains in the Employment Allowance, it is often worth reviewing whether a somewhat higher director salary, beyond the £12,570 figure, could make sense, since the usual National Insurance penalty for doing so may simply not apply while allowance headroom remains.
Putting It Together: A Full Profit Extraction Example
Worked Example 3: Halcyon Design Ltd
Halcyon Design Ltd is a sole director company owned by Kirsty, with profit of £90,000 before her pay is taken into account. Kirsty takes a salary of £12,570, incurring employer National Insurance of £1,136, which is fully deductible. This leaves company profit of £76,295 before Corporation Tax.
Because this profit falls between the £50,000 and £250,000 thresholds, marginal relief applies rather than the flat 19% or 25% rates. Applying the standard marginal relief calculation gives Corporation Tax of approximately £16,468, an effective rate of around 21.6% on this particular profit level. This leaves £59,827 available for distribution as a dividend.
Kirsty's Personal Allowance is already fully used by her salary, so the dividend is taxed from the £500 dividend allowance downward. The next £37,700, the full basic rate band, is taxed at 10.75%, coming to £4,053. The remaining £21,627 falls into the higher rate band and is taxed at 35.75%, coming to £7,731. Total personal tax on the dividend is approximately £11,784, leaving Kirsty a net dividend of around £48,043.
Combining her salary and net dividend, Kirsty takes home approximately £60,612 from an original company profit of £90,000. The combined cost of employer National Insurance, Corporation Tax and personal dividend tax across the whole structure comes to roughly £29,388, an effective overall rate of around 32.6% on the original profit. This blended rate remains considerably lower than the combined Income Tax and National Insurance rate that would apply if the same amount were taken entirely as salary, particularly once any of it crossed into higher rate territory.
Common Mistakes We See
Paying a dividend the company cannot actually support from its distributable profits is one of the most serious mistakes a director can make, since an unlawful dividend can be reclassified as a director's loan, triggering the Section 455 tax charge. Our guide on calculating dividends correctly and avoiding illegal dividends covers this in full.
Ignoring the effect of total income crossing £100,000 is another common oversight. Above this level, the Personal Allowance is gradually withdrawn, creating an effective marginal tax rate that can exceed 60% on income in that band. Directors extracting larger amounts of profit should plan around this threshold specifically, and our guide to electric vehicle salary sacrifice explains this trap in more detail, since pension contributions and salary sacrifice arrangements are often used to manage it.
Forgetting that the 2026 dividend rate rise changes the comparison is a mistake we are seeing this year in particular. Strategies that made sense under the 2025/26 rates do not automatically remain optimal now that basic and higher rate dividend tax has each risen by two percentage points.
Finally, treating the salary decision as a one off choice rather than an annual review is a mistake, since thresholds, Corporation Tax rates and your company's profit all move independently from one year to the next.
Frequently Asked Questions
What is the most tax efficient director salary for 2026/27?
For a sole director company with no other employees, a salary of £12,570, using the full Personal Allowance, is typically the more tax efficient option once Corporation Tax relief is taken into account, despite the larger employer National Insurance cost compared with a salary set at the Lower Earnings Limit. The exact answer depends on your company's Corporation Tax rate and profit level, so this is worth confirming individually rather than assuming.
Why not just take everything as dividends and pay no salary at all?
A company with no salaried directors misses out on Corporation Tax relief on what would otherwise be a deductible salary cost, and the director misses out on a qualifying year towards their State Pension unless they make voluntary National Insurance contributions separately. For most directors, a modest salary combined with dividends produces a better outcome than dividends alone.
Do I need to run a full payroll scheme for a small director salary?
Yes. Even a salary below the Income Tax and National Insurance thresholds generally needs to be reported to HMRC through Real Time Information payroll reporting if you are registered as an employer, and registration itself is usually required once any salary is paid to a director. CoreAcc Accountants sets this up and manages it as part of our payroll service.
What happens if the company does not have enough profit to pay the dividend I want to take?
A dividend can only be paid from distributable profits, calculated after Corporation Tax and any prior losses. Paying a dividend the company cannot support risks the payment being treated as an unlawful dividend and reclassified as a director's loan, which triggers a 33.75% Section 455 tax charge on the company. Always confirm distributable reserves before declaring a dividend.
How does the £100,000 income threshold affect the salary and dividend decision?
Once your total income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 of income above that level, disappearing entirely once income reaches £125,140. This creates an effective marginal tax rate on income within that band that can exceed 60%. Directors approaching this level should plan the timing and size of dividends carefully, and pension contributions are often used to manage adjusted net income below the threshold.
Does the 2026 dividend tax rise mean I should take a bigger salary instead?
Not automatically. The dividend rate rise makes dividends somewhat less attractive at the margin, but dividends still carry no National Insurance charge at all, which usually keeps them more efficient than salary once you are past the point of full Corporation Tax relief and Personal Allowance use. The right balance depends on your specific numbers rather than a general rule.
Can I pay a salary or dividend to my spouse if they are also a shareholder?
Yes, provided your spouse is genuinely a shareholder or an employee actually carrying out real duties for a genuine salary, this can be an effective way to use a second Personal Allowance and basic rate band within the household. HMRC does scrutinise arrangements that appear to exist purely to shift income for tax purposes, so any salary should reflect real work and any shareholding should reflect a genuine ownership stake. We would always recommend structuring this with proper advice rather than informally.
Does the Employment Allowance change what I should pay myself if I am a sole director?
No. The single director exclusion means a company where the only person paid above the Secondary Threshold is also a director cannot claim the Employment Allowance, regardless of how the salary is structured. The Employment Allowance only changes the calculation once the company has other genuinely employed staff on the payroll.
What CoreAcc Accountants Can Help You With
Getting the salary and dividend mix right is one of the highest value pieces of advice CoreAcc Accountants provides to director shareholders, and it needs revisiting every year as thresholds, Corporation Tax rates and your company's profit change. We calculate the optimal structure for your specific circumstances, taking into account whether your company can claim the Employment Allowance, whether you have other sources of income, and whether you are approaching the £100,000 threshold. We also run your payroll, prepare the paperwork needed to support dividends properly, and make sure everything is reported correctly to HMRC.
Get in Touch
The worked examples above show the mechanics, but every real company has a detail that changes the answer, a director's loan balance, a spouse who is also a shareholder, other income from a second job or a rental property, or an Employment Allowance question that depends on exactly how your payroll is set up. None of that shows up in a general guide.
If you have not reviewed your salary and dividend structure since the dividend tax rise in April 2026, get in touch and we will run the calculation against your actual company profit and personal circumstances, not a generic example, and confirm the exact salary and dividend figures that work best for you this year. A short call is usually enough to know whether your current setup still holds up.
CoreAcc Accountants is an ACCA accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was published in September 2026 and reflects tax rates, allowances and thresholds confirmed for the 2026/27 tax year at the time of writing. It does not constitute professional or legal advice. Always seek specific advice tailored to your individual circumstances.
