Salary vs dividends for a UK director (2026/27)
Last updated: 6 April 2026
In short
Most one-person UK company directors pay themselves a small salary plus dividends. A salary up to £12,570 uses the personal allowance and is a corporation-tax-deductible cost; profits taken above that are usually more efficient as dividends, taxed at 10.75% (basic) / 35.75% (higher) / 39.35% (additional) in 2026/27 after the £500 dividend allowance.
If you run a one-person limited company, how you pay yourself — salary, dividends, or a mix — changes how much tax you and the company pay. This guide explains the standard “low salary plus dividends” strategy for 2026/27, the thresholds that drive it, and where the decision actually tips.
Why salary and dividends are taxed differently
- Salary is a business expense, so it reduces the company’s profit and therefore its Corporation Tax bill. But salary attracts Income Tax and National Insurance — both employee’s and, above a low threshold, employer’s NI at 15%.
- Dividends are paid out of profit after Corporation Tax, so they don’t reduce the company’s tax bill. But they carry no National Insurance and are taxed at lower Income Tax rates than salary.
That trade-off — salary saves corporation tax but adds NI; dividends avoid NI but come from taxed profit — is the whole game.
The key 2026/27 numbers
| Item | 2026/27 figure |
|---|---|
| Personal allowance | £12,570 |
| Employee NI primary threshold | £12,570 |
| Employer NI secondary threshold | £5,000 (rate 15%) |
| Basic-rate band top | £50,270 |
| Dividend allowance | £500 |
| Dividend ordinary rate | 10.75% |
| Dividend upper rate | 35.75% |
| Dividend additional rate | 39.35% |
Income Tax on salary is 20% to £50,270, then 40% to £125,140, then 45%. The personal allowance tapers away once total income passes £100,000.
The standard approach: a low salary, then dividends
Most sole directors take a small salary and top up with dividends. There are two popular salary levels:
- £12,570 (the full personal allowance). No Income Tax on the salary, and it maximises the corporation-tax-deductible cost. The catch: because the employer’s NI secondary threshold is only £5,000, the company pays 15% employer’s NI on the slice between £5,000 and £12,570 (about £1,136). For most single-director companies the corporation-tax saving on the larger salary still outweighs that NI — but it’s close, and it depends on whether you can claim the Employment Allowance (a lone director usually cannot).
- £5,000 (the secondary threshold). No employer’s NI at all, but you waste part of your tax-free personal allowance and get a smaller corporation-tax deduction.
A salary of at least £6,500-ish (above the Lower Earnings Limit) also keeps the year as a qualifying year for the State Pension, which is worth protecting.
Rule of thumb: a salary around £12,570 is the common default for a single director who can’t claim the Employment Allowance, but run your own figures — the right answer shifts with your profit level and whether you have other income. Our dividend vs salary calculator does this comparison for you.
Dividends on top
Once salary is set, remaining profit is usually taken as dividends:
- The first £500 each year is covered by the dividend allowance (taxed at 0%).
- Dividends that fall in the basic-rate band are taxed at 10.75%.
- Dividends in the higher-rate band are taxed at 35.75%.
- Dividends in the additional-rate band are taxed at 39.35%.
Because salary uses up the personal allowance first, a director on a £12,570 salary can typically draw dividends up to roughly the £50,270 basic-rate ceiling before hitting the 35.75% rate — a common target for keeping the overall rate down.
Where the decision tips
- You need more than the basic-rate band. Once you’re into higher-rate dividends (35.75%), each extra pound costs noticeably more. Options like employer pension contributions (a deductible cost, no NI, no dividend tax) often beat taking more dividends.
- You have other income. A salaried job elsewhere, rental income or a pension fills your bands first and changes the split entirely.
- You’re inside IR35. If a contract is caught by IR35, the salary-vs-dividend choice largely disappears for that income — it’s taxed close to employment. See how that plays out with our IR35 take-home calculator.
- Retained profit. You don’t have to extract everything. Leaving profit in the company (or paying into a pension) can be more efficient than drawing higher-rate dividends you don’t need this year.
A worked sketch
A director with £50,000 of company profit to extract might take a £12,570 salary (using the personal allowance, deductible against corporation tax) and the balance as dividends, keeping most of those dividends inside the basic-rate band at 10.75%. The same £50,000 taken entirely as salary would attract employee and employer NI plus Income Tax on the whole amount — materially more tax overall. That gap is exactly what the low-salary-plus-dividends approach captures.
This guide is information and illustration only — not tax or financial advice — and uses published HMRC rates for 2026/27. Corporation Tax, the Employment Allowance rules and your own circumstances all affect the answer. Check gov.uk/tax-on-dividends and speak to an accountant before deciding how to pay yourself.
Try the tool Dividend vs Salary Calculator Find the most tax-efficient salary and dividend split for a UK limited company director in 2026-27, after Corporation Tax, dividend tax and NI. Free, no signup.