For directors of UK limited companies, taking the decision on how to take the money out of the business is one of the most crucial annual decisions to get right. The two main paths are a director’s salary paid through PAYE and dividends that are paid out of post tax company profits to shareholders. Each has a very different tax treatment and the 2026/27 tax year has come forward with new changes that make the decision more subtle than previous years.
From 6 April 2026, dividend tax rates increased by 2% points at the basic and higher rates whereas key thresholds like the Personal Allowance and the dividend allowance along with the National Insurance Secondary Threshold remain frozen. As a result the conventional “low salary, high dividend” strategy still is applicable for a lot of directors but it does not work for everyone automatically. This article discusses the key figures for 2026/27 and explains how salary and dividends are taxed.
How Salary and Dividends Are Taxed?
A director’s salary is taken into account exactly like any other employee’s pay. It is processed through PAYE and comes under Income Tax under the normal bands. Also it attracts employee (Class 1) National Insurance Contributions (NICs) after it exceeds the Primary Threshold. The company also pays employer (secondary) NICs on salary above the Secondary Threshold. It is important to know that salary is a deductible business expenditure which lowers the company’s Corporation Tax Bill.
Dividends are different. They can only be paid to shareholders, in proportion to their shareholding, and only out of retained, post-tax profits. Dividends are not liable to National Insurance at all, and the personal tax rates that apply to them are generally lower than the equivalent Income Tax rates on salary. However, because dividends are paid from profits that have already suffered Corporation Tax, the overall “tax take” on dividend income is not as low as the headline dividend rates might suggest.
Key Figures for the 2026/27 Tax Year
Income Tax and Personal Allowance
The standard Personal Allowance remains £12,570, and the higher rate threshold remains £50,270. Both have been frozen and are set to stay frozen until at least April 2031, meaning directors whose income grows in cash terms are gradually drawn into higher tax bands even without a real increase in earnings. The allowance tapers away for anyone with total income above £100,000, and is fully lost once income reaches £125,140.
National Insurance Thresholds
| Threshold | Amount (2026/27) | Significance |
| Secondary Threshold | £5,000 per year | Employer NICs (15%) apply on salary above this level |
| Lower Earnings Limit (LEL) | £6,708 per year | Minimum salary needed to secure a State Pension qualifying year |
| Primary Threshold | £12,570 per year | Employee NICs (8%, then 2% above £50,270) begin above this level |
Dividend Tax Rates
The dividend allowance remains £500 a year; dividends above this are taxed according to the recipient’s Income Tax band. Following the 2025 Autumn Budget, rates rose from 6 April 2026 as follows:
| Band | Rate from 6 April 2026 | Previous rate (2025/26) |
| Basic rate | 10.75% | 8.75% |
| Higher rate | 35.75% | 33.75% |
| Additional rate | 39.35% | 39.35% (unchanged) |
Scottish taxpayers pay Income Tax under different bands and rates, but dividend tax rates and thresholds are set at UK level and apply equally across the whole of the UK.
Employment Allowance
Companies that qualify can claim the Employment Allowance, now £10,500, to offset employer NICs. This can make a higher salary more attractive, since the usual 15% employer NIC cost on salary above the Secondary Threshold is reduced or eliminated. However, single-director companies with no other employees generally cannot claim this allowance, which is an important distinction when planning remuneration.
What Is the Most Tax-Efficient Salary in 2026/27?
There is no single figure that suits every company, but three salary levels come up repeatedly in tax planning because they align with the thresholds above:
- £5,000 – sits at the Secondary Threshold, avoiding employer NICs entirely, but too low to build a State Pension qualifying year.
- £6,708 – sits at the Lower Earnings Limit, securing a State Pension qualifying year at minimal NIC cost.
- £12,570 – sits at the Personal Allowance and Primary Threshold, meaning no employee NICs or Income Tax on the salary itself, while maximising the Corporation Tax deduction.
For many single-director companies without the Employment Allowance, a salary around the Lower Earnings Limit, topped up with dividends, remains a sensible starting point. Where the Employment Allowance is available, or where Corporation Tax rates are higher (companies with profits pushing into the 25% main rate or the marginal relief band between £50,000 and £250,000), a salary of £12,570 often produces a better overall result, because the value of the Corporation Tax deduction outweighs the employer NIC cost.
Ultimately, the right answer depends on the interaction of three factors: the company’s Corporation Tax rate, whether the Employment Allowance applies, and the director’s total income and tax band once salary and dividends are combined. A blanket rule of thumb is a reasonable starting point, but a proper calculation for each director’s own circumstances will usually reveal a more precise, and sometimes more valuable, answer.
Worked Illustration
Consider a director taking a salary of £12,570, with no other income. This salary uses the full Personal Allowance and sits exactly at the Primary Threshold, so no employee NICs or Income Tax are due on it. The company pays employer NICs of 15% on the £7,570 above the Secondary Threshold, roughly £1,136, but the whole £12,570 remains deductible against Corporation Tax.
The director could then draw dividends of up to £37,700 before reaching the higher rate threshold. After the £500 dividend allowance, the remaining £37,200 would be taxed at 10.75%, giving a personal dividend tax bill of around £4,000. Combined, this structure allows the director to draw £50,270 while keeping their overall tax and NIC burden considerably lower than if the same amount had been taken entirely as salary.
Practical Considerations Beyond the Numbers
Tax efficiency should not be the only consideration. Dividends can only be paid where the company has sufficient distributable, post-tax profits, confirmed by up-to-date management accounts. A board resolution and a dividend voucher recording the date, amount, and shareholder should accompany every dividend payment. Paying a dividend without adequate profits risks it being treated as an unlawful dividend, or reclassified as a director’s loan, which brings its own tax charges, including a Section 455 charge on outstanding loan balances.
Directors should also remember that only shareholders can receive dividends, in proportion to their shareholding, so a director who holds no shares cannot be paid this way. Pension contributions and certain benefits in kind are worth considering alongside salary and dividends, since employer pension contributions are deductible for Corporation Tax and, unlike salary, do not attract employer NICs.
Conclusion
The 2026/27 tax year has narrowed, but not eliminated, the advantage dividends hold over salary. Frozen thresholds mean more directors are drifting into higher tax bands each year, while the two-point rise in dividend tax rates has made the calculation more finely balanced, particularly for companies that qualify for the Employment Allowance or pay Corporation Tax at the main rate. A combination of a modest salary and dividend top-ups remains the standard approach for most owner-managed companies, but the precise salary level, whether £5,000, £6,708 or £12,570, deserves a fresh look each year rather than being carried over automatically. Directors are strongly encouraged to review their remuneration strategy with a qualified accountant before the start of, or early in, each tax year.
Frequently Asked Questions
1. Is it still better to take dividends instead of salary in 2026/27?
Generally, yes, for income above the tax-free salary level, but the gap has narrowed. Dividends avoid National Insurance entirely and are taxed at lower rates than salary, but they come from profits that have already been subject to Corporation Tax, and 2026/27’s higher dividend rates mean the advantage is smaller than in previous years. A blended approach of low salary plus dividends usually still beats an all-salary or all-dividend strategy.
2. What is the best director’s salary for 2026/27?
Most guidance points to £5,000, £6,708 or £12,570, depending on whether the company has the Employment Allowance and its Corporation Tax rate. £12,570 has become more commonly recommended this year because it maximises the Corporation Tax deduction, which increasingly outweighs the employer NIC cost, especially for companies paying tax above the small profits rate.
3. Do dividends affect my State Pension?
No. Dividends do not count towards National Insurance contributions or State Pension qualifying years, because they are not earnings. Only salary that reaches at least the Lower Earnings Limit (£6,708 in 2026/27) can build a qualifying year, which is why many directors keep some salary even if dividends form the bulk of their income.
4. How much is the dividend allowance in 2026/27?
The dividend allowance remains £500. The first £500 of dividend income each tax year is tax-free, regardless of which Income Tax band the recipient falls into, though it still counts towards determining which band applies to the rest of their income.
5. What are the dividend tax rates for 2026/27?
From 6 April 2026, dividends above the allowance are taxed at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate). The basic and higher rates each rose by two percentage points compared with 2025/26; the additional rate is unchanged.
6. Can I pay myself only in dividends and avoid a salary altogether?
It is possible, but rarely optimal. Without any salary, the company loses the Corporation Tax deduction that salary provides, and the director builds no State Pension entitlement for that year. Most tax advisers recommend at least a small salary, even where dividends make up most of the income.
7. Do I need paperwork to pay a dividend?
Yes. Before declaring a dividend, the company needs up-to-date management accounts showing sufficient distributable profit, a board resolution approving the payment, and a dividend voucher recording the date, company name, shareholder name and amount. Skipping this process risks the payment being reclassified as an unlawful dividend or a director’s loan.
8. Does the Employment Allowance change the ideal salary?
Yes. Companies that can claim the Employment Allowance (currently £10,500) can offset employer NICs, making a salary up to the £12,570 Primary Threshold more attractive, since the Corporation Tax saving is no longer eroded by employer NIC costs. Single-director companies with no other employees generally cannot claim this allowance.
