Guide
Salary or dividends in 2026/27: how directors should pay themselves
From 6 April 2026, dividend tax rose by two percentage points and employer National Insurance still starts at £5,000. Here is what that means for the usual director's salary, with the arithmetic shown.
In short
For most director-shareholders of a profitable company, a salary of £12,570 with the balance taken as dividends still produces the lowest overall tax in 2026/27, even where employer National Insurance is due on the salary. The company's corporation tax relief on the salary outweighs the National Insurance. The answer changes if the company is loss-making or can claim the Employment Allowance.
The 2026/27 figures that drive the decision
| Item | 2026/27 |
|---|---|
| Personal allowance | £12,570 |
| Dividend allowance | £500 |
| Dividend tax: basic / higher / additional rate | 10.75% / 35.75% / 39.35% |
| Employer National Insurance | 15% above £5,000 a year |
| Employee National Insurance starts at | £12,570 a year |
| Employment Allowance | Up to £10,500, not available to sole-director companies |
| Corporation tax | 19% up to £50,000 of profit; 25% above £250,000; 26.5% effective marginal rate in between |
Worked example: £5,000 or £12,570 salary?
Take a sole-director company paying corporation tax at 19%, with the director's income otherwise within the basic rate band. The question is how to deliver the £7,570 between the two salary levels: as extra salary, or as dividend.
| As salary | As dividend | |
|---|---|---|
| Paid to the director | £7,570 | £7,570 |
| Employer National Insurance (15%) | £1,135.50 | None |
| Income tax and employee National Insurance | None (within the personal allowance and employee NIC threshold) | None (covered by the unused personal allowance) |
| Company profit needed before tax | £8,705.50 (salary and NIC are deductible) | £9,345.68 (dividends come from profit after 19% tax) |
| Saving from paying salary | £640.18; about £1,594 where profits fall in the 26.5% marginal band | |
So the higher salary wins, as long as the company has taxable profits for the salary to be deducted from. A salary above the £6,708 lower earnings limit also secures a qualifying year for the State Pension.
When the answer changes
- The company claims the Employment Allowance. With a second employee or director paid above £5,000, the allowance can cover employer National Insurance, making £12,570 clearly better.
- The company is making a loss. With no corporation tax to save, National Insurance above £5,000 is a pure cost, so a lower salary may be better.
- The director has other income that already uses the personal allowance, such as a job, a pension or rental profits. The salary is then taxed, and the calculation must be redone.
Dividends after the 2026 rise
Above the salary, dividends are still usually the cheaper route. The margin has narrowed, though. Dividends within the basic rate band are taxed at 10.75% after the £500 allowance; above £50,270 of total income the rate is 35.75%. Dividends sit on top of other income, so a salary of £12,570 and dividends of £50,000 leaves most of the dividends taxed at 35.75%, not 10.75%.
Where a director does not need all the profit personally, employer pension contributions are usually more efficient than dividends. They are generally deductible for the company and free of National Insurance.
Do it properly
- Dividends can only be paid from accumulated profits after tax. An unlawful dividend can have to be repaid.
- Record each dividend with board minutes and a dividend voucher.
- Run the director's salary through payroll with RTI submissions, even when no tax is deducted.
- Set money aside for the 31 January tax bill and payments on account.
This guide is general information for the 2026/27 tax year. It is not advice for your circumstances. We set salary and dividends for each client once a year, alongside their corporation tax planning.
Common questions
Questions we are often asked
For most profitable companies, £12,570, which uses the personal allowance and is deductible for corporation tax. The corporation tax saved normally exceeds the 15% employer National Insurance due above £5,000. Loss-making companies, or directors with other income, may be better on a lower salary.
After the £500 dividend allowance, dividends are taxed at 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 rates each rose by two percentage points from 6 April 2026.
No. A company cannot claim if its only employee paid above the secondary threshold is its sole director. With a second director or employee paid above £5,000 a year, the company can usually claim up to £10,500.
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