Director salary and dividends: the optimal mix for 2026/27
If you run your own limited company, how you pay yourself is one of the few tax decisions entirely within your control. Get the salary and dividend mix right and you keep thousands more each year. Get it wrong and you hand the difference to HMRC without noticing. Here is how the numbers work for 2026/27.
Why salary first, then dividends
Salary is a deductible expense for your company, so it reduces corporation tax at 19% to 25%. But it attracts National Insurance: your company pays 15% employer NI on salary above £5,000, and you pay 8% employee NI on anything above £12,570. Dividends carry no National Insurance at all, but they are paid from profits that have already suffered corporation tax. The optimal strategy for most directors is a small salary up to a key threshold, with the rest taken as dividends.
The sweet spot: £12,570 for most directors
A salary of £12,570 uses your full personal allowance, so it carries no income tax and no employee NI. Your company does pay employer NI of roughly £1,135 on the slice above £5,000, but the salary and the employer NI are both deductible for corporation tax, and that saving normally outweighs the NI cost. Crucially, a salary at this level also protects your state pension record for the year.
If your company employs more than just you, the Employment Allowance can wipe out up to £10,500 of employer NI, which makes the £12,570 salary a clear winner. Companies where the sole director is the only person on the payroll cannot claim it, but £12,570 still usually comes out ahead once corporation tax relief is counted.
How your dividends are taxed in 2026/27
The first £500 of dividends is tax free. After that, dividends falling in the basic rate band are taxed at 10.75%, the higher rate band at 35.75%, and the additional rate at 39.35%. Compared with salary at the same level, dividends in the basic rate band remain markedly cheaper once National Insurance is factored in.
Watch the £100,000 trap
Once your total income passes £100,000, your personal allowance is withdrawn at £1 for every £2 of income above the line. The effective tax rate on income between £100,000 and £125,140 climbs to roughly 60%. If your profits allow it, holding total income just under £100,000 and leaving the rest in the company, or making a pension contribution, is often worth thousands.
Run your own numbers in seconds
Our free director take-home calculator shows exactly what a given salary and dividend mix leaves in your pocket for 2026/27, including the 60% trap warning. It uses the same rates we use for clients.
The right answer also depends on student loans, other income, and whether pension contributions would serve you better than dividends. That is where proper tax planning earns its keep. Book a free consultation and we will map the optimal mix for your exact situation, or get an instant fixed fee with our quote tool.
