Director tax guide · 2026/27
Salary vs Dividends UK — How to Structure Director Pay
As a limited company director you choose how to extract income from your company. The question is never purely "salary or dividends" — it's how to combine the two alongside pension contributions and corporation tax to reach the best after-tax outcome for your specific situation.
The full picture: how money flows
Understanding director pay starts with tracing how money moves from company revenue through to your bank account. Each step has a tax cost.
Company revenue / profit
Before any tax or extraction
↓
Corporation Tax — 19% to 25%
Charged on profit after allowable costs (including salary)
↓
Post-CT profit available for extraction
Paid as dividends — no NI, but personal dividend tax applies
↓
Director take-home
Salary + dividends + any pension contributions
Why salary still matters
Many directors take a low salary — often around the National Insurance Lower Earnings Limit (£6,396) or Secondary Threshold (£9,100) — to preserve NI credits for State Pension entitlement without paying NI. Some take salary up to the Personal Allowance (£12,570) to reduce company profit (and thus Corporation Tax) without triggering personal Income Tax or NI.
- State Pension credits: To receive a qualifying year for State Pension, salary must be at least at the Lower Earnings Limit (£6,396 in 2026/27)
- Mortgage affordability: Lenders often use salary (not dividends) to assess borrowing. A very low salary can affect mortgage applications
- CT deduction: Salary is deductible against corporation tax. Each £1,000 of salary reduces your CT bill by £190–£250 depending on your rate
- NICs: Salary above the primary threshold (£12,570) triggers both employee (8%) and employer (13.8%) NI — making high salaries costly
Common approach: Take salary at £12,570 (full Personal Allowance) if the company has no other employees — this maximises the CT deduction without triggering NI, and means no income tax on the salary either.
Why dividends are popular
Dividends come from post-corporation-tax profit. They're not subject to National Insurance (neither employee nor employer) — which is the primary reason directors extract most income as dividends. The trade-off is that dividend income has been taxed once already via CT.
| Dividend band | Rate 2026/27 | Income range |
|---|
| Dividend allowance | 0% | First £500 of dividends |
| Basic rate dividends | 8.75% | Up to £50,270 (inc. other income) |
| Higher rate dividends | 33.75% | £50,271 to £125,140 |
| Additional rate dividends | 39.35% | Above £125,140 |
Dividend rates stack on top of other income including salary. A director taking £12,570 salary and dividends will use £12,570 of their Personal Allowance on the salary first — dividends then stack above that.
Worked example — £60,000 company profit target
Comparing three approaches for a sole director taking £60,000 from a company with £80,000 net profit. CT assumed at 19% (small profits rate). No other employees.
| Strategy | Salary | Dividends | CT on profit | Total personal tax + NI | Take-home |
|---|
| Salary only — £60k | £60,000 | — | £3,800 (CT on £20k) | £15,457 | £44,543 |
| Low salary + dividends | £12,570 | £47,430 | £5,793 (CT on £80k−£12,570) | £4,374 | £55,626 |
| NIL salary + dividends | £0 | £60,000 | £6,270 (CT on £80k−£nil) | £5,574 | £54,426 |
The low salary + dividends approach saves over £11,000 vs salary alone in this scenario. The saving comes primarily from avoiding employee and employer NI on most of the income.
Note: These figures are illustrative. Your exact outcome depends on total company profit, other directors, employment allowance eligibility, and other factors. Use the salary vs dividend calculator for your specific numbers.
Worked example — £100,000 extraction
For a director targeting £100,000 personal income. Company has sufficient profit. CT small profits rate (19%) assumed for simplicity.
| Approach | Salary | Dividends | Personal tax + NI | Take-home |
|---|
| £12,570 salary + dividends to £100k | £12,570 | £87,430 | £22,074 | £77,926 |
| Full salary — £100,000 | £100,000 | — | £34,434 | £65,566 |
At £100k extraction, the dividend approach saves approximately £12,000 vs salary alone. However, note that the £100k threshold means any dividend income pushing personal adjusted net income above £100k starts triggering the Personal Allowance taper — requiring careful planning.
Adding pension contributions
The optimal structure for most directors includes a pension as the third element alongside salary and dividends. Pension contributions made by the company are:
- Deductible against corporation tax (saving 19–25% CT)
- Not subject to NI (employee or employer)
- Not subject to Income Tax on the way in (within the annual allowance)
- Not counted as income for the Personal Allowance taper test
At £80k profit and a £20k employer pension contribution: The pension reduces CT-liable profit, saves NI, reduces the director's adjusted net income below the £100k threshold (if relevant), and builds retirement wealth — all simultaneously.
NI saved (vs salary)
21.8%
Employee + employer NI avoided on dividend income
Dividend allowance
£500
Tax-free dividends per year, 2026/27
CT small profits rate
19%
On profits up to £50,000
Frequently asked questions
Should I take any salary at all?
Most directors take at least a small salary for two reasons: first, to receive qualifying years for the State Pension (requires at least the Lower Earnings Limit of £6,396); second, because a salary up to £12,570 is deductible against corporation tax with no NI or income tax cost — effectively a free deduction. The most common approach is £12,570 salary where there are no other employees and employment allowance cannot offset NI.
Does the £12,570 salary approach still work?
Yes — for a sole director with no other employees, taking salary at the Personal Allowance (£12,570) is typically optimal. It avoids both employee NI (primary threshold £12,570) and employer NI (secondary threshold £9,100 — yes, employer NI is due on salary between £9,100 and £12,570 unless the Employment Allowance applies). Sole directors cannot claim the Employment Allowance. Consider whether the £9,100 level (avoiding all NI) is preferable if CT savings don't outweigh the employer NI cost.
What is the optimal salary if I have employees?
If your company can claim the Employment Allowance (£5,000 for 2026/27), employer NI can be offset — making a higher director salary more efficient. In this case, salary up to £12,570 can avoid all employer NI costs (if the allowance is sufficient). Use the salary vs dividend calculator to model your exact position.
How are dividends taxed when stacked with salary?
Dividends are treated as the top layer of income, stacking above salary and other income. So if you take £12,570 salary and £40,000 dividends, the dividends run from £12,570 to £52,570. The portion between £12,570 and £50,270 is taxed at the basic dividend rate (8.75%). The portion above £50,270 is taxed at the higher rate (33.75%).
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