Dividend vs Salary 2026/27: How Should a Limited Company Director Pay Themselves?

"Should I pay myself a salary or dividends?" is the classic limited company director question — and the answer changed on 6 April 2026, when dividend tax rates went up by two percentage points.

Here's the 2026/27 picture, the numbers behind it, and the strategy most directors should follow.

The 2026/27 rates at a glance

Salary (as an employee)

• Income tax: 20% / 40% / 45% above the £12,570 personal allowance (frozen until 2030/31)
• Employee National Insurance: 8% between £12,570 and £50,270, then 2%
• Employer National Insurance: 15% on earnings above £5,000 a year

Dividends

• Dividend allowance: £500 tax-free
• Basic rate: 10.75% (up from 8.75%)
• Higher rate: 35.75% (up from 33.75%)
• Additional rate: 39.35% (unchanged)

The Autumn Budget 2025 confirmed the dividend increases — a direct result of the tax on savings and dividend income rising two points.

The classic strategy (still mostly right)

For most directors, the most tax-efficient approach remains:

1. Take a salary up to the personal allowance — £12,570 a year, which is below the employer NI secondary threshold of £5,000... wait, no. £12,570 is above £5,000, so employer NI applies above £5,000.

Let's be precise. The employer NI secondary threshold is £5,000 a year. A salary of £5,000 sits exactly at that threshold: no employer NI, no employee NI, no income tax — and it's a corporation tax-deductible expense. A salary above £5,000 triggers 15% employer NI on the excess, so for a director in a single-person company, the sweet spot is often a salary around £5,000–£12,570 depending on whether you can claim Employment Allowance.

2. Take the rest as dividends, up to the basic rate band where possible.

Dividends are paid from post-tax company profits (after corporation tax at 19% or 25%), but they attract no National Insurance — which is their main advantage over salary.

Worked example: £50,000 total extraction

Let's compare a £50,000 extraction from a company paying 19% corporation tax.

All salary (£50,000):

• Employer NI: 15% on £45,000 above the £5,000 threshold = £6,750 extra company cost
• Employee NI and income tax at source

£12,570 salary + £37,430 dividends:

• No employer NI on the salary
• £500 of dividends are tax-free
• £11,940 of dividends taxed at 10.75% ≈ £1,284
• The remainder taxed at 35.75% where it exceeds the higher-rate threshold

Dividends win on National Insurance alone — that's the persistent reason they're the default for directors.

When should you take more salary?

Salary beats dividends when the company doesn't have enough profit for dividends, or when you need to:

• Build pension or state pension entitlements — only salary (or voluntary Class 3 NI) builds your state pension record
• Get tax relief for things like pension contributions, which are easier to set up via payroll
• Claim Employment Allowance — if you employ staff (other than directors), you can reclaim up to £5,000 of employer NI, which changes the maths entirely

The £500 dividend allowance trap

The dividend allowance was cut from £1,000 to £500 in 2024/25 and stays there. Even small dividend payments above £500 now attract tax, so directors with multiple shareholders or spouse-shareholder arrangements need to plan carefully.

Don't forget the other side of the balance sheet

• Corporation tax is 19% on profits up to £50,000 and 25% above (2026/27 unchanged).
• Directors' loan accounts — if you take more than you're entitled to, you owe the company and potentially pay benefit-in-kind tax or a 33.75% charge on outstanding loans.
• Dividend declarations must be documented in writing, even for a one-person company.

Get your extraction strategy right

There's no one-size-fits-all answer — it depends on your profit level, whether you employ staff, your pension plans and your partner's income. A quick planning review can be worth thousands.

Book a free call with NTM Associates Ltd to review your salary/dividend mix for 2026/27.

Rates as confirmed in the Autumn Budget 2025 (26 November 2025) and current HMRC guidance. This is general information, not personal financial advice.