Salary vs Dividends 2026/27: What’s the Most Tax-Efficient Way to Pay Yourself as a Company Director?
EA
If you run an owner-managed limited company, “salary or dividends? is never just a preference it is a design choice that touches Corporation Tax, National Insurance, Income Tax, pension credit, and whether you still have distributable reserves to pay a dividend at all.
This guide is for directors who want a clear 2026/27 picture: what the confirmed HMRC thresholds are, why a single “magic salary” is usually the wrong answer, and how total tax (company plus personal) changes under realistic scenarios.
We work with ambitious owner-managed businesses every week on this exact trade-off. Nothing here is a ranking promise or personal advice; your optimum depends on profits, other income, Employment Allowance eligibility, and cash needs. If you want numbers run on your accounts, talk to our accountancy services team.
Rates and thresholds in this article were checked against GOV.UK on 11 September 2026. Re-check the linked pages before you rely on any figure if HMRC has updated them.
So what salary should I actually take in 2026/27?
There is no single correct salary for every director. The right level depends on whether Employment Allowance is available, whether you need a National Insurance qualifying year, and how much other income you already have. Use the three paths below as planning starting points — then stress-test them against your profits and cash.
1) Sole director / no Employment Allowance
Many one-person limited companies cannot claim Employment Allowance. HMRC’s rule is blunt: if the company has only one director and that director is the only employee liable for secondary Class 1 National Insurance, Employment Allowance is not available.
That includes cases where other people are on the payroll but only the director is paid above the Secondary Threshold of £5,000.
In that world, employer NI at 15% on salary above 5,000 is a real cash cost. Against that, salary and employer NI generally reduce profits charged to Corporation Tax.
Practical guidance for 2026/27:
Planning salary | Why directors consider it | Watch-outs
£5,000 (Secondary Threshold) | No employer NI | Below the Lower Earnings Limit — may not protect a State Pension qualifying year
6,708 (Lower Earnings Limit) | Aims at an NI qualifying year with no employee NI; modest employer NI (256)
£12,570 (Personal Allowance / Primary Threshold) | Uses the Personal Allowance; no employee NI; stronger CT deduction | Employer NI on £7,570 (£1,136) unless EA applies
Above 12,570 | Commercial need, mortgage evidence, or other planning | Employee NI at 8% (then 2% above £50,270) plus more employer NI
In our £80,000 profit worked example, a £12,570 salary plus dividends produced more cash and lower total tax than 5,000, £6,708, or £20,000. That result is scenario-specific, not a universal rule.
2) Company eligible for Employment Allowance
Employment Allowance for 2026/27 is up to £10,500 against employer Class 1 secondary NI. You may be eligible where more than one employee or director is paid above the Secondary Threshold.
When EA covers employer NI on your chosen salary, the CT deduction from salary becomes much cheaper in cash terms.
Practical guidance where EA is available:
- A salary up to £12,570 is often the clean planning anchor: Personal Allowance used, no employee NI, and employer NI is typically fully offset by EA.
- Pushing salary deeper into the basic-rate band, for example £20,000, can still be covered by EA but you then pay employee NI and Income Tax.
- Confirm eligibility every year. If circumstances change, stop the claim.
3) Director with substantial other income
If you already have meaningful employment, property, or sole-trade income, your Personal Allowance and basic-rate band may already be partly or fully used. Company salary then stacks on top — and dividends may be taxed at higher rates sooner.
Practical guidance:
- Do not assume a 12,570 company salary is still tax-free. Other income may already have consumed the Personal Allowance.
- A lower company salary at the Lower Earnings Limit (£6,708) can be worth weighing if you need a qualifying year from the directorship and want to limit employer NI.
- Extra sole-trade or property income can also pull you into Making Tax Digital for Income Tax on that other income.
Scottish taxpayers: salary is taxed under Scottish bands and rates; dividend rates and the £500 dividend allowance remain UK-wide. National Insurance and Corporation Tax are also UK-wide.
2026/27 rates directors actually need
Personal Allowance, bands, and the £100,000 taper
- Personal Allowance: £12,570
- Basic-rate band: £37,700; higher-rate threshold £50,270 with full Personal Allowance in England, NI and Wales
- Additional rate: income above £125,140
- Taper: Personal Allowance falls by £1 for every £2 of adjusted net income above £100,000, down to £0 at £125,140
Once combined salary, dividends and other income cross £100,000, the taper raises your effective marginal rate.
National Insurance (Category A) — directors on an annual basis
Threshold | 2026/27 annual | Why it matters
Lower Earnings Limit (LEL) | £6,708 | Floor often used for a State Pension qualifying year
Secondary Threshold (ST) | £5,000 | Employer NI starts above this
Primary Threshold (PT) | £12,570 | Employee NI starts above this
Upper Earnings Limit (UEL) | £50,270 | Employee NI drops from 8% to 2% above this
Employee NI is 8% between PT and UEL, and 2% above UEL. Employer NI is 15% on earnings above the ST with no upper limit for standard Category A.
Directors’ Class 1 NI is normally calculated on an annual earnings period. Weekly LEL salary shortcuts can fail if the annual total from that employment is below £6,708.
Dividends
- Dividend allowance: 500
- Rates on dividends above the allowance (6 April 2026 to 5 April 2027): 10.75% basic, 35.75% higher, 39.35% additional
- Dividends within unused Personal Allowance are not taxed, but other income often uses the allowance first
- Dividend rates are UK-wide, including for Scottish taxpayers
Basic and higher dividend rates are 2 percentage points higher than 2025/26 — refresh any spreadsheet still using 8.75% / 33.75%.
Corporation Tax (financial year from 1 April 2026)
Band | Rate
Taxable profits £50,000 or less | 19% small profits rate
Taxable profits above £250,000 | 25% main rate
Between £50,000 and £250,000 | Main rate less Marginal Relief (standard fraction 3/200)
In the Marginal Relief band, the effective tax on the next £1 of profit is often illustrated at about 26.5%. This is a derived marginal effect, not a separate labelled statutory rate. Associated companies and short accounting periods reduce the limits.
Interaction with pay:
- Salary plus employer NI payable generally reduce taxable profits; wholly and exclusively and timing rules apply.
- Dividends are not a Corporation Tax deduction — they come from post-tax profits and need distributable reserves under company law.
- PAYE must run for salary. Dividends need proper minutes or resolutions and dividend vouchers or tax certificates.
Employment Allowance — amount and the single-director rule
- Allowance: up to £10,500 for 2026/27
- Single-director exclusion: limited companies cannot claim if they have just one director and that director is the only employee liable for secondary Class 1 NI
- EA can unlock when more than one employee or director earns above the Secondary Threshold
Always confirm current eligibility on GOV.UK before building a plan around EA.
How the comparison works (method)
Every worked example below uses the same method so you can compare apples with apples:
1. Start with profit before director salary and employer NI.
2. Pay the chosen salary; calculate employer NI at 15% above £5,000; apply Employment Allowance only where the scenario says the company is eligible.
3. Deduct salary plus employer NI actually payable for Corporation Tax.
4. Charge CT at 19%, or main rate less Marginal Relief, or 25%, as appropriate.
5. Pay the remaining post-CT profit as a dividend (full extraction).
6. Calculate employee NI, Income Tax and dividend tax for England, NI and Wales.
7. Report cash extracted to the director (net) and total tax paid by company and director.
Assumptions common to the tables: no associated companies; augmented profits equal taxable profits for Marginal Relief; distributable reserves equal post-CT profit; no student loan; no Gift Aid; Category A NI; director NI on an annual basis; figures rounded to the nearest pound in tables.
Worked examples
Example set A £80,000 profit, sole director, no Employment Allowance
Assumptions: England taxpayer; no other income; not EA-eligible; full dividend extraction.
Salary | Employer NI payable | Corporation Tax | Dividend | Cash to director | Total tax
£5,000 | 0 | £16,125 | £58,875 | £55,012 | £24,988
6,708 (LEL) | £256 | £15,604 | £57,431 | £55,182 | £24,818
£12,570 (PT/PA) | 1,136 | £13,818 | £52,476 | £55,765 | 24,235
£20,000 | £2,250 | £11,554 | £46,196 | £55,222 | £24,778
Takeaway: With profits in the Marginal Relief band, paying yourself up to the Personal Allowance can win on both cash and total tax versus avoiding employer NI. Going to £20,000 added employee NI and Income Tax without improving the outcome.
Example set B — £80,000 profit, Employment Allowance eligible
Assumptions: same profit and taxpayer profile; EA available and applied to this director’s employer NI (simplified).
Salary | Employer NI payable | EA note | Dividend | Cash to director | Total tax
5,000 | £0 | n/a (no ER NI) | £58,875 | £55,012 | £24,988
£6,708 | £0 | EA fully offsets £256 | £57,620 | 55,303 | 24,697
£12,570 | £0 | EA fully offsets £1,136 | £53,311 | £56,301 | £23,699
20,000 | £0 | EA fully offsets £2,250 | £47,850 | £56,284 | 23,716
Takeaway: When EA wipes employer NI on a £12,570 salary, that level is the clear winner in this set. A £20,000 salary remains almost as good on cash but costs more personal tax and NI for negligible gain.
Example set C — £120,000 profit, sole director, no EA
Salary | Cash to director | Total tax
6,708 | £74,072 | £45,928
£12,570 | £74,654 | £45,346
£50,270 (fill basic-rate band with salary) | £71,968 | £48,032
Takeaway: Filling the basic-rate band entirely with salary is rarely efficient once employer NI is 15% from £5,000 and employee NI applies. Prefer salary for the allowance and threshold design, then dividends for the rest, subject to reserves and higher-rate dividend tax.
Example set D — £60,000 company profit plus £40,000 other income, sole director, no EA
Assumptions: £40,000 other non-dividend income already in the director’s personal tax computation; England; full extraction from the company.
Company salary | Dividend | Cash from company (net) | Total tax on company extraction path
£0 | £47,850 | £33,365 | £26,635
6,708 | £42,731 | £33,766 | £26,234
£12,570 | £37,499 | £33,868 | £26,132
Takeaway: Other income changes the personal tax stacking. In this illustration a £12,570 company salary still edged ahead on company cash and extraction-path tax but the Personal Allowance was consumed by combined non-dividend income, so the salary was not tax-free in the everyday sense. Model your own other income before copying anyone’s favourite number.
Example set E — £130,000 profit and the Personal Allowance taper
Full extraction here pushes adjusted net income through 100,000, so the Personal Allowance starts to taper.
Salary | Personal Allowance left | Cash to director | Total tax
12,570 | £11,672 | £78,973 | 51,027
£6,708 | £12,125 | £78,635 | £51,365
Takeaway: Crossing the taper does not automatically flip the salary decision but it does mean every extra pound of income is more expensive than the headline dividend rate suggests. Directors near £100k often combine lower extraction, pension contributions, or timing across accounting periods (advice required).
Example set F — Employer pension as an alternative route
Same £80,000 profit, sole director, no EA, salary 12,570:
Approach | Employer pension | Cash to director | Total tax on extraction | Notes
Salary plus dividends only | 0 | 55,765 | £24,235 | Comparator
Salary plus £10,000 employer pension plus dividends | £10,000 | £51,042 | £18,958 | Cash falls; £10,000 sits in the pension pot; CT and dividend tax both fall
Employer contributions to a registered pension scheme are generally Corporation Tax deductible when paid, and are usually disregarded for Class 1 NI. They are not spending money in your personal account. Annual Allowance and wholly and exclusively rules still apply — especially for controlling directors.
Beyond the spreadsheet: paperwork, reserves, and pensions
PAYE for salary
Director salary belongs on a real payroll with Real Time Information submissions. The company pays employer NI through PAYE. “I’ll just tidy it at year-end” is how late filing and incorrect NI methods start.
Dividends need reserves and records
Cash in the bank is not the same as distributable reserves. Under the Companies Act 2006, distributions may only be made from profits available for the purpose. Illegal dividends create risk for directors and shareholders.
Keep:
- Board or shareholder decisions (minutes or written resolutions)
- Dividend vouchers or tax certificates for recipients
- Accounts that support the distribution
National Insurance qualifying years
A salary between the LEL (£6,708) and the Primary Threshold (£12,570) can support a qualifying year for the new State Pension without employee NI, provided the annual earnings rules are met. You usually need 35 qualifying years for a full new State Pension, and at least 10 for any. Check your own NI record before prioritising this over cash-flow or CT planning.
Higher rate, additional rate, and other income
Dividends use your remaining basic-rate band after non-dividend income. Other income, tapering Personal Allowance, and the jump to 35.75% and 39.35% dividend tax are where copy-the-blog-salary plans break. Owners with mixed income often need a joined-up Self Assessment picture exactly where Easeys work with growing owner-managed companies earns its keep.
FAQs
Is £12,570 still the best director salary in 2026/27?
It is a common planning anchor when you have little other income and want to use the Personal Allowance without paying employee NI and it performed best in several worked examples. It is not automatically best if Employment Allowance is unavailable and your CT position differs, if other income has used your allowance, or if you only need an LEL salary for a qualifying year. Run the totals; do not treat £12,570 as a slogan.
Can a single-director company claim Employment Allowance?
Usually no, if that director is the only employee liable for secondary Class 1 NI. HMRC’s further guidance is explicit: companies with several employees where the director is still the only person paid above the Secondary Threshold are also out.
EA can become available for the tax year if another employee or director is paid above the Secondary Threshold.
Do I pay National Insurance on dividends?
No. Dividends are not earnings for Class 1 NI. A pure-dividend strategy looks attractive until you factor in Corporation Tax, dividend tax rates, loss of a qualifying year from that employment, and the reserves test.
Should I take a salary at the Secondary Threshold (5,000) to avoid employer NI?
It avoids employer NI, but it sits below the LEL, so it may not protect a qualifying year from that job, and you give up CT relief on a larger salary. In our £80k sole-director example it produced less net cash than £6,708 or £12,570.
How do Scottish tax bands change this?
Scottish Income Tax bands apply to salary and other non-savings, non-dividend income. Dividend tax rates stay at the UK figures in this article. Re-model salary tax before using England tables.
Can I pay myself only dividends?
Sometimes, if you have reserves and accept the NI and State Pension consequences and the lack of a CT deduction. Many lenders still prefer to see salary. Most owner-directors use a mix.
Are employer pension contributions better than dividends?
They can be highly efficient for retirement funding: usually CT-deductible, generally outside Class 1 NI, and not taxed as a dividend. They do not put cash in your current account. Annual Allowance and company-purpose rules matter.
What paperwork do I need for dividends?
A valid decision to distribute, confirmation that reserves support it, and a written dividend voucher or tax certificate for the recipient. Treat this as mandatory governance, not optional admin.
Sources
- Rates and thresholds for employers 2026 to 2027 (HMRC; includes NI thresholds, 15% employer rate, Employment Allowance £10,500)
- Tax on dividends (dividend allowance £500; 2026/27 dividend rates)
- Income Tax rates and Personal Allowances (Personal Allowance; £100,000 taper; UK bands)
- Income Tax rates and allowances (current and past)
- Corporation Tax rates and Corporation Tax rates and allowances
- Marginal Relief for Corporation Tax
- Claim Employment Allowance eligibility
- Single-director companies and Employment Allowance: further guidance
- National Insurance for company directors
- Your State Pension explained (qualifying years; LEL / Primary Threshold weekly figures)
- Companies Act 2006 section 830 (distributable profits)
- CTA 2010 section 1104 (dividend tax certificates)
Easey Accounts is an ACCA / MAAT practice working with ambitious owner-managed businesses. This article is general information for the 2026/27 tax year, not personalised tax advice. Rules depend on your facts — including associated companies, accounting period dates, and Employment Allowance eligibility.
Last reviewed: 11 September 2026
Author: Easey Accounts (ACCA / MAAT)
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