Salary vs Dividends 2026/27: How to Pay Yourself as a Director
If you run your own limited company, you’ve probably asked your accountant (or Google) some version of the same question every spring: “how much salary should I actually take this year?” It’s a fair question, and the honest answer is that it changes slightly every tax year as thresholds and dividend rates move around. Here’s where things stand for 2026/27, and why the “right” answer isn’t quite as simple as it used to be.
At Filing Accounts, we work through this exact calculation with clients every year as part of preparing their accounts. Nothing here is personalised tax advice for your specific situation u2014 think of it as the groundwork so a conversation with your accountant goes further, faster.
Why Not Just Take a Big Salary?
You could pay yourself entirely through PAYE, like any employee. Nothing stops you. The reason most directors don’t is simple: salary is expensive to extract. Above £12,570 you’re paying 20% (then 40%) income tax, plus 8% employee National Insurance, and the company is paying 15% employer National Insurance on top of that. Dividends skip National Insurance entirely, on both sides. That gap is the whole reason the salary-plus-dividends combination exists as a strategy in the first place.
That said, dividends aren’t automatically the better option for every pound. They’re paid from what’s left after Corporation Tax, using profits your company has actually made u2014 you can’t just declare a dividend because you fancy some cash out of the business bank account, and doing so without genuine retained profits behind it is a real legal problem, not just a paperwork one.
The Two Numbers Everyone Talks About: £6,708 and £12,570
For 2026/27, most of the advice you’ll see settles on one of two salary levels, and it’s worth understanding why.
£6,708 is the Lower Earnings Limit u2014 the threshold for a qualifying year toward your State Pension. Pay yourself this much and there’s no income tax, no employee NIC, and no employer NIC either, since it sits below every relevant threshold. It’s the “minimal admin, protect your pension record” option.
£12,570 matches your full personal allowance. You still pay no income tax and no employee NIC (the primary threshold happens to match the personal allowance too), but the company does start paying employer NIC on the portion above £5,000 u2014 roughly £1,135 a year. Here’s the part people miss: that extra salary is a deductible business expense, so it reduces your Corporation Tax bill too. For most companies, the Corporation Tax saved on the higher salary outweighs the employer NIC cost, which is why £12,570 tends to come out ahead even without any special reliefs.
The Employment Allowance Wrinkle
This is where it gets specific to your company. Employment Allowance can wipe out up to £10,500 of employer NIC a year u2014 but it isn’t available to a company where the only employee liable for employer NIC is also a director. In plain terms: if you’re a solo director with no other staff, you almost certainly can’t claim it, and that £1,135 of employer NIC on a £12,570 salary is a real cost to weigh up. If you’ve got a second director or an employee earning above the threshold, you likely can claim it, and in that case £12,570 becomes even more clearly the better number, since the employer NIC gets cancelled out entirely.
2026/27 Dividend Tax Rates
Dividends increased from 6 April 2026, so if you were mentally using last year’s numbers, it’s worth updating them:
| Band | 2026/27 Rate |
|---|---|
| Dividend allowance | u00a3500 tax-free |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Both the basic and higher dividend rates rose by 2 percentage points this year. It’s still cheaper than the equivalent salary in most cases, but the gap has narrowed a little u2014 worth bearing in mind if you’re comparing your position to a few years ago.
A Rough Worked Example
Take a sole director, no other employees, company profits comfortably covering a £30,000 total extraction for the year. A common structure would be a £12,570 salary (no income tax, no employee NIC, a small employer NIC bill that’s still worth it for the Corporation Tax relief), with the remaining £17,430 taken as dividends. The first £500 of dividends is tax-free; the rest, assuming the director has no other income pushing them into the higher rate, is taxed at 10.75%. Compare that to trying to extract the same £30,000 purely as salary, where a meaningful chunk would be lost to income tax and NIC on both sides u2014 the combination consistently comes out ahead.
Things That Change the Answer for You
- Other income u2014 a second job, rental income, or a working spouse’s earnings all affect which tax band your dividends land in
- Whether you qualify for Employment Allowance u2014 covered above, and genuinely one of the biggest swing factors
- Your company’s profit level u2014 whether you’re paying the 19% small profits rate or somewhere in the marginal relief band changes the value of the Corporation Tax deduction on salary
- Whether you’re near the £100,000 mark u2014 see our guide on the £100k personal allowance trap, since dividends count toward this too
- Pension contributions u2014 employer pension contributions are a Corporation Tax deductible alternative to extracting more cash personally, worth considering alongside salary and dividends rather than instead of them
Practical Things to Get Right
Whatever split you land on, a few things matter regardless: run your salary through proper payroll (not just a bank transfer with “salary” in the memo), keep board minutes and dividend vouchers for every dividend declared, check your company actually has enough retained profit before declaring one, and remember dividends still need declaring on your Self Assessment return even though there’s no tax deducted at source.
Common Mistakes to Avoid
Declaring Dividends Without Enough Retained Profit
An “illegal dividend” u2014 one declared without sufficient distributable reserves u2014 can need to be repaid to the company and creates real problems if the company later faces financial difficulty.
Using Last Year’s Dividend Rates
The rate increase from 6 April 2026 catches out directors still planning around 2025/26 figures.
Assuming £12,570 Is Automatically Right for Every Company
It’s the most common answer, not a universal one u2014 Employment Allowance eligibility and your company’s profit level can change the calculation.
Frequently Asked Questions
What’s the most tax-efficient director’s salary for 2026/27?
For most directors, £12,570 a year, topped up with dividends. Sole directors without Employment Allowance sometimes find £6,708 works out similarly well once employer NIC is factored in u2014 the right figure depends on your specific numbers.
Why not just take dividends and skip salary entirely?
A small salary is still a deductible business expense that reduces Corporation Tax, and it protects your State Pension record — dividends do neither.
Have dividend tax rates gone up for 2026/27?
Yes — both the basic and higher rates rose by 2 percentage points from 6 April 2026, to 10.75% and 35.75%.
Can I declare a dividend whenever I want cash out of the company?
No. Dividends can only be paid from distributable profits, and must be properly documented — otherwise it can be treated as an illegal dividend.
Want This Worked Out for Your Own Numbers?
General guidance only gets you so far — your actual profit level, Employment Allowance position, and other income all change the answer. At Filing Accounts, we work out the right salary and dividend split for your specific company as part of preparing your annual accounts.
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