Salary vs Dividends: Tax-Efficient Director Pay for 2026/27

If you run your own limited company, how you pay yourself, salary, dividends, or a mix, has a real effect on your total tax bill. Here is how the numbers work for 2026/27, and why the calculation changed this year.

Why the split matters

A limited company director can extract income in two main ways:

Salary: paid through PAYE like any employee, subject to Income Tax and National Insurance (both employee and employer NI), but it is a deductible business expense that reduces the company's Corporation Tax bill. See our payroll guide for how PAYE and NI actually work.

Dividends: paid from the company's after-tax profit, to shareholders. They are not a deductible expense (the company has already paid Corporation Tax on the profit they come from), but they are not subject to National Insurance, only dividend tax, on the individual receiving them.

Because these two routes are taxed so differently, the combination you choose changes your total tax bill, sometimes significantly. A third, informal route, simply taking money out as a director's loan rather than salary or dividend, carries its own tax traps if left outstanding too long; see our director's loan account and S455 guide.

Current rates you need (2026/27)

Income Tax: Personal Allowance £12,570, then 20% basic rate, 40% higher rate, 45% additional rate.

Employee National Insurance: 8% on earnings between £242 and £967 a week, 2% above that.

Employer National Insurance: 15% on earnings above £5,000 a year (per employee).

Corporation Tax: 19% up to £50,000 profit, 25% above £250,000, marginal relief in between.

Dividend allowance: £500 tax free.

Dividend tax rates: 10.75% basic rate, 35.75% higher rate, 39.35% additional rate.

Important change for 2026/27: dividend tax rates rose by 2 percentage points across the board (from 8.75% and 33.75% to 10.75% and 35.75% for basic and higher rate) from 6 April 2026, following the Autumn 2025 Budget. The additional rate stayed at 39.35%. This narrows, but does not eliminate, the tax advantage of dividends over salary compared to previous years.

The typical strategy

The common approach for a director with no other income is:

1. Take a salary up to a level that uses your Personal Allowance and, often, sits at or near the Employer NI secondary threshold, so the company pays little or no employer NI on it, while the salary itself is still a deductible expense reducing Corporation Tax.

2. Take the rest of your income as dividends, using the £500 dividend allowance first, then accepting basic rate dividend tax on the next portion, and structuring to avoid tipping into higher rate dividend tax where possible.

Why this generally beats an all-salary approach: a higher salary is taxed at Income Tax rates plus employee National Insurance, and costs the company employer National Insurance on top. Dividends avoid National Insurance entirely (both employee and employer sides), even though the underlying profit has already been taxed once at the Corporation Tax rate. The combined effective tax rate on dividends is usually lower than the combined effective rate on an equivalent amount of salary, particularly once you are above the basic salary threshold.

Why an all-dividend approach is not usually best either: paying no salary at all forfeits your NI contributions record (which affects State Pension entitlement and eligibility for some benefits), and misses the chance to use salary as a Corporation Tax deductible expense at zero or near-zero NI cost, at least up to the relevant thresholds.

Worked example

A director with no other income, extracting £55,000 total for the year:

• Salary: £12,570 (using the full Personal Allowance, no Income Tax due on this portion, and structured to minimise NI depending on the exact threshold used)
• Dividends: £42,430

Dividend tax on the £42,430: the first £500 is tax free (dividend allowance). The remaining amount is split across the basic rate band (10.75%) and, once total income crosses £50,270, the higher rate band (35.75%). The exact split depends on precisely how the salary and dividend amounts interact with the thresholds, this is where the calculation genuinely benefits from being run precisely for your specific numbers rather than estimated.

The key point: the same £55,000 extracted as pure salary would trigger higher combined Income Tax, employee NI, and employer NI than the salary and dividend combination above, the gap has narrowed with the 2026/27 dividend rate rise, but has not disappeared.

What changed in 2026/27, and why it matters now

The 2 percentage point rise in basic and higher rate dividend tax means the salary versus dividend gap is smaller than it was even one tax year ago. For a director drawing dividends within the basic rate band, that is broadly an extra £20 of tax for every £1,000 of dividend income compared to 2025/26.

This does not flip the strategy, dividends are still generally more tax efficient than an equivalent amount of salary in most cases, but it does mean the split worth using has shifted slightly, and a strategy that was optimal last year is not automatically still optimal this year. This is exactly the kind of change worth reviewing annually rather than assuming last year's numbers still apply.

How Books & Returns helps

Getting the salary and dividend split right is not a one-time decision, it should be reviewed every tax year as rates change, as your profits change, and as your personal circumstances change. We calculate the optimal split for your specific numbers, handle the payroll and dividend paperwork correctly, and revisit the strategy each year so you are never running last year's plan against this year's rates.

This guide is for general information only and does not constitute tax advice. The optimal salary and dividend split depends on your specific circumstances, always confirm your position with a qualified accountant before making decisions based on this content.