Director’s Remuneration: Salary vs Dividends 2026/27

As a director, you build profit in your company, but the moment you want to take money out for yourself, you face the classic dilemma: Should I pay myself a salary, take dividends, or use a combination of both?

Get the mix right, and you can legally save thousands in tax and National Insurance every year. Get it wrong, and you could overpay tax, lose valuable pension contributions, or trigger an unexpected HMRC bill.

This factsheet gives you the exact 2026/27 tax rates and thresholds, a simple, ready-to-use optimal mix table, the full picture on National Insurance, pensions and Corporation Tax, plus the most common (and costly) pitfalls to avoid – including the dreaded overdrawn director’s loan account.

Whether you’re a one-director company or have a small team, this guide will help you extract your profits in the most tax-efficient way possible.

Remember, every situation is different – this is general guidance only. For advice tailored to your company and personal circumstances, we strongly recommend speaking to a professional accountant.

Current tax rates & thresholds (2026/27)

To decide the best mix of salary and dividends, you first need the exact tax rules for the 2026/27 tax year (6 April 2026 to 5 April 2027). Below are the key figures that apply to most limited company directors in England, Wales and Northern Ireland.

Personal Allowance

• £12,570 – tax-free income (tapered by £1 for every £2 of adjusted net income over £100,000 – fully lost at £125,140)
  

Income Tax rates & bands (non-dividend income)

Band	Taxable income after Personal Allowance	Tax rate
Personal Allowance	£0 – £12,570	0%
Basic rate	£12,571 – £50,270	20%
Higher rate	£50,271 – £125,140	40%
Additional rate	Over £125,140	45%

Basic rate band width: £37,700 (frozen until at least 2031)

Dividend tax rates (from 6 April 2026)

Tax band	Dividend allowance	Tax rate on dividends above the allowance
Basic rate	£500	10.75%
Higher rate	£500	35.75%
Additional rate	£500	39.35%

(The dividend allowance is a 0% tax band – it does not increase your basic or higher rate bands.)

National Insurance (Class 1) – Directors

Employee (primary) NI

• Primary Threshold: £12,570

• Upper Earnings Limit: £50,270

• Rate: 8% between £12,570 and £50,270

• Rate: 2% on earnings above £50,270

Employer (secondary) NI

• Secondary Threshold: £5,000

• Rate: 15% on earnings above £5,000 (Note: Employment Allowance of £10,500 is not available if the only employee is a director.)

Corporation Tax rates (financial year 2026)

Company profits	Corporation Tax rate
£0 – £50,000	19%
£50,001 – £250,000	26.5% (marginal relief)
Over £250,000	25%

These rates and thresholds are frozen for several years, so the optimal salary-vs-dividend strategy is even more important now than in previous years.

Optimal Mix Calculator (with ready-to-use table)

For the vast majority of directors in 2026/27, the most tax-efficient strategy is very simple and consistent:

Take a salary of exactly £12,570. Take everything else as dividends

Why this mix wins

• Uses your full £12,570 personal allowance

• Avoids all employee National Insurance (8%)

• Keeps as much income as possible taxed at the lower dividend rates

• The salary is deductible from company profits, saving Corporation Tax (covered in Section 3)
  

Ready-to-Use Dividend Tax Table

(after taking £12,570 salary)

Annual dividends	Dividend tax payable	Effective tax rate on dividends
£10,000	£1,021	10.2%
£20,000	£2,096	10.5%
£30,000	£3,171	10.6%
£37,700	£3,999	10.6%
£50,000	£8,396	16.8%
£75,000	£17,334	23.1%
£100,000	£26,271	26.3%

How to use the table Simply look up the amount of dividends you plan to take and you’ll instantly see the tax due. (The £500 dividend allowance is already applied in every row.)

Quick reference points

• Up to £37,700 dividends → stays entirely in the basic rate band

• £37,701+ dividends → higher-rate dividend tax (35.75%) kicks in

• £112,571+ dividends → additional-rate dividend tax (39.35%) applies (total income over £125,140)
  

Note on employer National Insurance Taking the £12,570 salary will cost your company an extra £1,136 in employer NI (15% on the amount above £5,000). This is a small price compared with the tax savings it creates.

Use the table above to quickly work out your personal tax at any dividend level. In the next section, we’ll show how National Insurance, pensions and Corporation Tax change the overall picture.

National Insurance, Pensions & Corporation Tax Impact

The £12,570 salary + dividends strategy works so well because it creates the best outcome across three important areas.

1. National Insurance

• Dividends = 0% National Insurance (no employee or employer NI)

• Salary up to £12,570 = 0% employee NI (you sit exactly at the threshold)

• Your company pays £1,136 employer NI (15% on the £7,570 above the £5,000 threshold).
  

This £1,136 is fully tax-deductible, so the real net cost is much lower (see Corporation Tax below).

2. Pensions

Only salary counts as “qualifying earnings”.

Benefits of the £12,570 salary:

• It satisfies auto-enrolment rules (if you have staff or trigger them yourself).

• The company can pay employer pension contributions on the salary – fully deductible from profits.

• You can make personal pension contributions and claim tax relief at your marginal rate (20%, 40% or 45%).

• Dividends do not count as relevant earnings, so they do not help you access higher-rate pension tax relief or employer contributions in the same way.
  

3. Corporation Tax

Salary (and the employer NI on it) is a deductible business expense. Dividends are paid from after-tax profits.

Real cost comparison (to give yourself £12,570)

Method	Gross amount	Employer NI	Corporation Tax saved (at 19%)	Net cost to the company
£12,570 salary	£12,570	£1,136	£2,604	£11,102
Same amount as dividends only	£15,518	£0	£0	£15,518

Result: Using salary saves the company £4,416 in this example compared with taking the same amount as pure dividends.

Key takeaway The small £12,570 salary is almost always the most efficient route because:

• You pay zero employee NI

• You unlock full pension contribution opportunities

• The company gets a valuable Corporation Tax deduction
  

Higher salaries (above £12,570) usually become expensive very quickly because of 8% employee NI and 15% employer NI.

In the next section we look at the most common (and expensive) pitfalls that catch many directors out.

Common Pitfalls

Even directors who understand the salary vs dividends strategy can still make expensive mistakes. Here are the most frequent pitfalls we see, and how to avoid them in 2026/27.

1. Overdrawn Director’s Loan Account (the biggest risk)

• You take money out of the company without calling it a salary or dividend.

• If the loan is still overdrawn 9 months after the company’s year-end, HMRC charges 33.75% tax on the outstanding balance (Section 455 tax).

• The tax is repayable only when the loan is cleared, but in the meantime it’s a cash-flow hit.
  

How to avoid it Never use the company as a personal piggy bank. If you need money, decide in advance: salary, dividend, or a properly documented loan that is repaid within 9 months of the year-end.

2. Taking no salary at all

• Many directors take £0 salary to “save” on National Insurance.

• This means they miss out on the full £12,570 personal allowance being used tax-free.

• It also reduces pension contribution opportunities and can cause problems with auto-enrolment or state pension credits.
  

How to avoid it Stick to the £12,570 salary unless you have a very specific reason (e.g. very low profits or claiming certain benefits).

3. Paying dividends when there are insufficient profits

• Dividends can only be paid from distributable profits (retained earnings after Corporation Tax).

• Paying dividends from overdrawn funds or when the company is loss-making can make them illegal and reclassified as a loan.
  

How to avoid it Check the company’s profit & loss account and balance sheet before every dividend. Always prepare proper board minutes and dividend vouchers.

4. Taking salary above £12,570 without good reason

• Every £1 above £12,570 costs 8% employee NI + 15% employer NI.

• This is rarely worth it unless you need the extra salary for mortgage applications, pension contributions, or to use up the basic rate band.
  

How to avoid it Only increase salary above £12,570 if you have a clear, documented reason.

5. Forgetting the £500 dividend allowance

• The £500 allowance is a 0% tax band that applies every year.

• Many directors forget to use it and pay 10.75% or 35.75% tax unnecessarily.
  

How to avoid it Plan your first £500 of dividends to fall into the allowance each tax year.

6. Poor record-keeping

• No board minutes, no dividend vouchers, no clear loan account records.

• HMRC can reclassify everything as salary, triggering extra NI and penalties.
  

How to avoid it Keep simple but accurate records: board minutes for every dividend, dividend vouchers, and a properly maintained director’s loan account.

Avoid these six pitfalls and you will protect the tax savings you’ve worked hard to create.

You now have the full picture for 2026/27. The final section (Conclusion) brings everything together and shows you the next step.

Conclusion

The optimal strategy for most directors in 2026/27 is now very clear:

Take a salary of exactly £12,570. Take everything else as dividends

This simple mix keeps your total tax and National Insurance as low as possible, fully uses your personal allowance, protects your pension rights, and gives the company a valuable Corporation Tax deduction.

Use the ready-to-use table in Section 2 and the key figures in Section 1 to work out your exact position quickly.

Ready to put this strategy into action and keep more of what you earn?

Book your free discovery call with Suzanne Lock Business Services today. We’ll review your company’s latest numbers, run your exact salary vs dividend figures for 2026/27, and build a personalised remuneration plan that is 100% tailored to you.

Let’s make sure you’re not paying a single penny more in tax than you need to. We look forward to speaking with you.