Director's Salary & Dividends 2026/27: The Optimal Split

Why directors take a low salary and top up with dividends

When you run a limited company, you control how you extract profit — as salary, dividends, pension contributions, or a combination. The tax treatment of each is fundamentally different, and that difference is why the vast majority of owner-directors take a low salary and supplement it with dividends.

Salary is taxed as income and attracts National Insurance from both the employee and the employer. For earnings above the personal allowance (£12,570), income tax starts at 20%. Employee NI is charged at 8% above the primary threshold (£12,570). And the company pays employer NI at 15% on any salary above £5,000 — a cost that comes directly from company profits.

Dividends are paid from post-corporation-tax profit and taxed at lower rates. There is no NI on dividends — neither employee nor employer. The basic dividend tax rate is 8.75%, compared to a combined 28% (20% income tax + 8% employee NI) that applies to salary in the basic-rate band.

The arithmetic strongly favours dividends for any director who has the flexibility to choose. The saving is not trivial — for a director drawing £50,000 total, the difference between an optimal salary/dividend split and taking everything as salary can exceed £4,000 per year.

The two optimal salary levels for 2026/27

The "right" salary level depends on one key question: is your company eligible for the Employment Allowance?

Option 1: Salary of £12,570 (with Employment Allowance)

If your company qualifies for the Employment Allowance — which means it has at least one other employee on the payroll in addition to the director, or is a company where the sole director is not the only employee — the optimal salary is £12,570, equal to the full Personal Allowance.

Why £12,570 works when EA is available:

• The salary uses your full Personal Allowance, so zero income tax is payable on it.
• Employee NI is zero — the primary threshold is also £12,570, so no employee NI is triggered.
• The company pays employer NI at 15% on the amount above £5,000: 15% × £7,570 = £1,136.
• But the Employment Allowance (£10,500 in 2026/27) covers this employer NI in full, leaving no net NI cost.

The result: £12,570 of salary extracted with no income tax and no NI (because EA absorbs the employer NI).

Option 2: Salary of £9,100 (without Employment Allowance — sole directors)

Sole directors — those who are the only person on their company payroll — cannot claim the Employment Allowance. This has been the rule since April 2020. For sole directors, the optimal salary is the secondary NI threshold of £9,100, because this is the point at which employer NI starts.

Why £9,100 works for sole directors:

• Salary up to £9,100 attracts zero employer NI (below the secondary threshold of £5,000... wait — let us be precise: employer NI is payable on salary above £5,000 at 15%). A salary of £9,100 triggers employer NI on £4,100 (£9,100 − £5,000) = £615.

Actually, the precise calculation worth considering: a salary of exactly £5,000 would trigger zero employer NI. However, salary between £5,000 and £9,100 creates a modest employer NI cost, while the salary above £5,000 still benefits from being below the Personal Allowance (no income tax). Many accountants recommend £9,100 to trigger a qualifying year for State Pension purposes (you need earnings of at least £6,396 for a qualifying year), accepting the small employer NI cost of £615. Some advise £6,396 to secure State Pension qualification with the minimum NI cost.

The key principle: without EA, keep salary low enough that employer NI is zero or minimal, then take the balance as dividends.

Dividend allowance and rates for 2026/27

Once salary is set, the remainder of profit is distributed as dividends. For 2026/27:

Dividend allowance: £500 The first £500 of dividend income is free of dividend tax. This is a significant reduction from the £2,000 allowance that existed until April 2023. The allowance is not a separate allowance layered on top of the Personal Allowance — it sits within your income and uses up your basic-rate band.

Dividend tax rates 2026/27:

No National Insurance is payable on dividends — this remains one of the key advantages over salary.

Important: dividends are paid from post-corporation-tax profit. The company first pays corporation tax (19% on profits up to £50,000; 25% above £250,000; Marginal Relief between £50,000–£250,000), then distributes the remainder as dividends. The dividend tax rates above are applied to the dividend received — not the gross company profit.

How employer NI changed in April 2025

The April 2025 Budget changes significantly affected the salary/dividend calculation for directors.

Before April 2025:

• Employer NI rate: 13.8%
• Secondary threshold (point at which employer NI starts): £9,100/year

From April 2025:

• Employer NI rate: 15%
• Secondary threshold: £5,000/year

This double blow — a higher rate and a lower threshold — increased employer NI costs substantially. A director on a salary of £12,570 now generates employer NI of £1,136 (15% × £7,570) compared to £486 previously (13.8% × £3,520 above the old £9,100 threshold). This makes the Employment Allowance even more valuable, and makes the sole-director case for a lower salary stronger than before.

Worked example: Sarah, sole director, £50,000 company profit

Sarah runs a limited company providing consulting services. After business expenses, her company has £50,000 profit before salary. She is the only director and employee, so no Employment Allowance is available.

Scenario A: All salary

Sarah pays herself £50,000 as salary (ignoring employer NI for simplicity, though this would also be a company cost):

• Income tax: Personal Allowance £12,570 tax-free; £37,430 at 20% = £7,486
• Employee NI: 8% on £37,430 (above primary threshold) = £2,994
• Employer NI: 15% on £45,000 (above £5,000) = £6,750 (a company cost reducing net salary paid)
• Total tax and NI cost: ~£17,230
• Take-home: ~£32,770

Scenario B: Optimal salary + dividends (no EA, sole director)

Sarah takes a salary of £9,100, with the remaining profit distributed as a dividend.

Salary of £9,100:

• Corporation tax is calculated before salary deduction (salary is a deductible company expense)
• Income tax on salary: £9,100 is below Personal Allowance → £0
• Employee NI: £9,100 is below primary threshold → £0
• Employer NI: 15% × (£9,100 − £5,000) = 15% × £4,100 = £615 (company cost)

Remaining profit for dividend:

• Company profit: £50,000
• Less salary: £9,100
• Less employer NI: £615
• Adjusted profit before corporation tax: £40,285
• Corporation tax at 19%: £7,654
• Post-tax profit available as dividend: £32,631

Dividend tax:

• Dividend of £32,631
• £500 dividend allowance: tax-free
• Remaining £32,131 taxable at basic rate (Sarah's total income is £9,100 salary + £32,631 dividend = £41,731, within the basic-rate band)
• Sarah's Personal Allowance: £12,570. Used against salary (£9,100) — £3,470 of PA remains
• Taxable dividends: £32,631 − £500 allowance − £3,470 remaining PA = £28,661 at 8.75%
• Dividend tax: £2,508

Total tax and costs (Scenario B):

• Employer NI: £615
• Corporation tax: £7,654
• Dividend tax: £2,508
• Total: £10,777

Take-home: £50,000 − £10,777 = £39,223

Saving vs all-salary: £39,223 − £32,770 = £6,453

This saving of over £6,000 — on the same underlying £50,000 of company profit — illustrates why virtually every limited company director structures their remuneration this way.

When a higher salary makes sense

The salary/dividend split is not always optimal for every director in every situation. There are several scenarios where taking more salary is the right decision:

1. Mortgage applications

Most high street lenders and many specialist mortgage providers will assess income based on a combination of salary and dividends — but often at a disadvantage to dividend income. Common lender approaches include:

• Using an average of the last 2–3 years' dividends (problematic if the business is new or profits vary)
• Capping the dividend multiple at a lower level than salary
• Requiring more documentation for dividend income vs PAYE

If you are planning to apply for a mortgage — particularly a large one — taking a higher salary for one to two years before application can strengthen your case. Speak with a mortgage broker who specialises in self-employed and director cases before changing your remuneration strategy.

2. Pension contributions

Employer pension contributions paid directly from the company are corporation tax-deductible, do not attract NI, and do not count toward your salary. This makes employer pension contributions highly tax-efficient and often a better use of surplus company profit than paying higher salary or dividends.

Personal pension contributions (paid personally, not by the company) are limited to 100% of your UK earnings (salary counts; dividends do not). If you want to make large personal pension contributions, you need sufficient salary to support them.

3. Statutory Maternity, Paternity, and Shared Parental Pay

Statutory Maternity Pay (SMP) is based on your average weekly earnings from employment over the 8 weeks before the 15th week before your due date. The minimum qualifying earnings threshold is the lower earnings limit (£6,396 in 2026/27), but SMP is calculated as 90% of average weekly earnings for the first 6 weeks, then the flat weekly rate. A very low salary means SMP is calculated on a low base — you could receive significantly less than if you had taken a modest salary.

Directors who are planning a family should review salary levels before the calculation period begins.

4. Building State Pension entitlement

You need at least 35 qualifying years of National Insurance contributions or credits to receive the full new State Pension. A qualifying year requires NICs or credits on earnings of at least the lower earnings limit (£6,396 in 2026/27). If your salary is below £6,396, you may not generate a qualifying year — consider this carefully over a long career as a director.

5. Employment and mortgage references

Some financial transactions and references (tenancy applications, credit checks, insurance) look at documented employment income. A very low salary may create complications in these contexts even where it is tax-optimal.

Corporation tax interaction with the salary/dividend decision

The salary/dividend decision is inseparable from corporation tax. Salary is a deductible company expense — every £1 of salary reduces company taxable profit by £1, saving corporation tax at 19%–25%. Dividends are paid from post-tax profit — no corporation tax deduction.

Example of the corporation tax interaction:

Suppose the company has £50,000 profit and is paying 19% corporation tax. If you take £10,000 as salary vs £10,000 as dividend:

• Salary route: company profit reduced to £40,000; corporation tax on £40,000 = £7,600. But you pay income tax + NI on the salary.
• Dividend route: corporation tax on £50,000 = £9,500 (£1,900 more). Then dividend tax at 8.75% on £10,000 = £875.

The dividend route costs £875 more in dividend tax but £1,900 more in corporation tax — the corporation tax cost of using dividends is offset by the lower personal tax rate. The net effect is that dividends are still more efficient, but the margin is smaller than it appears when you only look at income tax and NI rates.

At the small profits rate (19%), the corporation tax "saved" by salary is 19p per £1 of salary. At the main rate (25%), it is 25p per £1. The salary deduction benefit is greater for companies paying 25% corporation tax.

Checklist before setting your director's salary

Before finalising your salary level each April, work through this checklist:

1. Employment Allowance eligibility — do you have employees other than yourself? EA may be available.
2. Pension contributions — are you planning employer pension contributions? These reduce taxable profit without salary implications.
3. Personal Allowance position — do you have other income (rental, savings interest, dividends from other companies) that uses up your Personal Allowance?
4. Spouse/partner involvement — is your spouse or civil partner a director or shareholder? Their tax position affects the optimal split for the household.
5. Mortgage plans — are you planning to apply for a mortgage in the next 12–24 months?
6. Family planning — could SMP become relevant?
7. Company profitability — are there sufficient distributable reserves to pay the intended dividend?
8. Dividend allowance coordination — if your spouse is also a shareholder, dividends can be split between you to use two dividend allowances (£500 each = £1,000 household allowance).

Sources

• HMRC: Employer National Insurance contributions
• gov.uk: Dividend tax rates and allowances
• HMRC: Employment Allowance
• gov.uk: Corporation Tax rates and reliefs
• HMRC: Directors and National Insurance
• gov.uk: Statutory Maternity Pay