Salary vs Dividends for Limited Company Directors (2026/27)

Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income above £100,000. Basic-rate band: next £37,700, giving a £50,270 higher-rate threshold in England, Wales and Northern Ireland.

Employee NIC: 8% between the £12,570 primary threshold and £50,270, 2% above. Employer NIC: 15% above the £5,000 secondary threshold. Employment Allowance: up to £10,500 a year, but not available where a director is the only employee paid above the secondary threshold.

Dividends: £500 allowance, then 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% in the additional-rate band. The basic and higher dividend rates rose by two percentage points from 6 April 2026.

Figures reflect the 2026/27 UK tax year (6 April 2026 to 5 April 2027) for England, Wales and Northern Ireland at the content update date. Scottish income tax bands differ for salary but not for dividends. Check GOV.UK, or ask us, before relying on them.

A salary at or above the £6,708 lower earnings limit keeps a qualifying year for State Pension purposes. Paying up to £12,570 uses the personal allowance against income tax without employee NIC.

Where the company can claim Employment Allowance, for example with two directors on payroll or other employees, a £12,570 salary is commonly efficient because the employer NIC is covered and the salary saves Corporation Tax. A sole director who is the only employee cannot claim Employment Allowance. Paying £12,570 then creates employer NIC of 15% on £7,570, which is £1,135.50, though both salary and NIC reduce Corporation Tax. Whether £5,000 or £12,570 is better depends on the company's Corporation Tax rate and your total income, so we calculate both.

A dividend can be paid only from distributable profits, meaning accumulated realised profits after Corporation Tax and previous distributions. Interim dividends are usually declared by the directors with board minutes and a dividend voucher. Paying more than available profits can create an unlawful dividend that may have to be repaid.

Dividends are taxed in the year they are paid, not when the profit was made, which makes timing across 5 April a planning tool.

Illustration only, 2026/27, England, no other income: a director takes a £12,570 salary and £37,700 of dividends. The salary uses the personal allowance. The first £500 of dividends uses the dividend allowance; the remaining £37,200 is taxed at 10.75%, giving about £3,999 of dividend tax. Total income of £50,270 stays within the basic-rate band.

Above £50,270, each additional £1,000 of dividends costs £357.50 of personal tax, after the company has already paid Corporation Tax on the profit. Between £100,000 and £125,140, losing the personal allowance raises the effective marginal rate further.

Employer pension contributions are generally deductible for Corporation Tax where wholly and exclusively for the business, and carry no NIC or dividend tax. They count towards the £60,000 annual allowance, which can be tapered for high incomes, and are inaccessible until the normal minimum pension age. For directors who do not need all their profit now, they are often the most tax-efficient extraction route.