UK Salary vs Dividends: The Optimal Split for Directors 2026/27

One of the most common tax planning decisions for owner-managed limited companies is how to split income between salary and dividends. The right structure can save thousands of pounds each year. This guide walks through the 2026/27 figures, the logic behind the optimal split, and a detailed worked example.

Why the Salary-Dividend Split Matters

As a company director and shareholder, you have flexibility that employed workers do not. Your company can pay you a salary (deducted as an expense before corporation tax) and you can also take dividends from post-tax profits. Each form of income is taxed differently, and combining them efficiently reduces your overall tax burden.

The key inefficiency you are trying to avoid is National Insurance. Salary above the NI thresholds triggers both employee NI (8% up to £50,270, 2% above) and employer NI (15% above £5,000 per year for 2026/27). Dividends are not subject to NI at all -- they come from company profits that have already been taxed at corporation tax rates.

The NI Thresholds You Need to Know

For 2026/27:

• Lower Earnings Limit (LEL): £6,396 per year (£533/month). Earnings at or above this level count as a qualifying year for State Pension purposes, even though no NI is actually paid.
• Primary Threshold: £12,570 per year. Employee NI at 8% applies on earnings above this level.
• Secondary Threshold: £5,000 per year. Employer NI at 15% applies on salary above this threshold.

The employer NI secondary threshold dropped significantly from £9,100 to £5,000 in April 2025, which changed the optimal salary calculation for many directors.

Finding the Optimal Salary

Option 1: £6,396 (Lower Earnings Limit) Taking salary at exactly the LEL means you pay no NI at all -- neither employee nor employer. You still get a qualifying year for your State Pension because earnings are at the LEL. However, you leave the tax-free Personal Allowance (£12,570) unused on salary, meaning you will need more dividends to use it up, which are taxed.

Option 2: £9,100 (Old secondary threshold) This was the popular choice before April 2025. It is now less relevant since the employer NI secondary threshold dropped to £5,000.

Option 3: £12,570 (Personal Allowance) with Employment Allowance If your company can claim the Employment Allowance (£10,500 for 2026/27, available to companies with employer NI bills below £100,000 in the prior year -- but not if the sole employee is also the sole director), the employer NI on salary up to £12,570 can be offset. Taking salary at £12,570 uses your Personal Allowance fully and means zero income tax on that salary. Employee NI applies on the slice above £12,570 -- which is nil if salary is exactly £12,570.

Option 4: £12,570 without Employment Allowance If you are the sole director-shareholder, you typically cannot claim the Employment Allowance. In this case, salary of £12,570 triggers employer NI of 15% on (£12,570 minus £5,000) = 15% x £7,570 = £1,135.50 in employer NI. This employer NI is a company expense (saving 19-25% corporation tax), so the net cost may still be worthwhile, but you need to run the numbers for your specific situation.

Worked Example: Director Taking £12,570 Salary Plus Dividends

Let us work through a realistic example for 2026/27. Assume:

• Director-shareholder of a small limited company
• Employment Allowance is available (at least one other PAYE employee)
• Company profit before director salary: £90,000
• Director takes salary of £12,570 and wants to extract an additional £30,000

Step 1: The salary

• Salary: £12,570
• Income tax on salary: £0 (within Personal Allowance)
• Employee NI on salary: £0 (exactly at Primary Threshold)
• Employer NI on salary: £0 (offset by Employment Allowance)
• Corporation tax saving on salary: £12,570 x 19% = £2,388 (assuming profit below £50k after salary)

Step 2: Company profit after salary

• £90,000 minus £12,570 = £77,430 profit before corporation tax
• Corporation tax at graduated rate (profits above £50k but below £250k): approximately 21.5% effective rate
• Approximate corporation tax: £77,430 x 21.5% = ~£16,647
• Profit after corporation tax available for dividends: ~£60,783

Step 3: Dividends of £30,000

• First £500 covered by the dividend allowance: £0 tax
• Remaining £29,500 taxed at basic rate (director's total income is £12,570 salary + £30,000 dividends = £42,570, all within basic rate band up to £50,270)
• Dividend tax: £29,500 x 8.75% = £2,581.25
• Total personal tax on £30,000 dividends: £2,581.25

Step 4: Compare to all-salary alternative If the director took £42,570 entirely as salary:

• Income tax: (£42,570 minus £12,570) x 20% = £30,000 x 20% = £6,000
• Employee NI: (£42,570 minus £12,570) x 8% = £30,000 x 8% = £2,400
• Employer NI: (£42,570 minus £5,000) x 15% = £37,570 x 15% = £5,635.50
• Total taxes on the additional £30,000: £6,000 + £2,400 + £5,635.50 = £14,035.50
• Plus the company saves no corporation tax on the same amount (salary reduces profit, but then profit does not attract CT -- swings and roundabouts)

The dividend route saves approximately £11,454 in this example compared to taking all income as salary.

The Impact of the Reduced Dividend Allowance

The dividend allowance fell from £2,000 to £1,000 in 2023/24, and then to £500 in 2024/25, where it remains for 2026/27. This means the tax-free slice of dividends is now minimal. A director taking £30,000 in dividends only avoids tax on the first £500 -- the remaining £29,500 is fully taxable.

This makes dividend income less attractive than it was a few years ago, but it is still significantly more efficient than salary above the NI thresholds, primarily because dividends carry no NI liability.

Higher Rate Taxpayers

If your total income (salary plus dividends) exceeds £50,270, the excess dividends fall into the higher rate dividend band, taxed at 33.75%. This changes the calculation substantially.

For a director taking £12,570 salary plus £60,000 dividends:

• Basic rate dividends: (£50,270 minus £12,570 minus £500) = £37,200 x 8.75% = £3,255
• Higher rate dividends: (£60,000 minus £37,200 minus £500) = £22,300 x 33.75% = £7,526
• Total dividend tax: approximately £10,781

At this level, the comparison against salary becomes tighter, and some directors may find other strategies (pension contributions, spousal income splitting where genuinely appropriate) worthwhile to explore.

Pension Contributions as an Additional Tool

One strategy that complements the salary-dividend split is making employer pension contributions directly from the company. These are fully deductible for corporation tax purposes and do not count as income for the director (provided they are within the Annual Allowance of £60,000 for 2026/27). This reduces the company's taxable profit without the NI costs of salary.

Frequently Asked Questions

Q: Can my spouse or partner be paid a salary to reduce the company tax bill? A: Yes, if they genuinely work in the business. Salaries must reflect actual work done and be commercially reasonable -- paying a non-working spouse simply to shift income is likely to be challenged by HMRC. If they do perform real duties, a legitimate salary reduces company profits and may use their Personal Allowance efficiently.

Q: Does it matter that the dividend allowance is only £500 now? A: It matters at the margin -- you pay 8.75% on dividends that previously fell within a larger tax-free allowance. But dividends still carry no NI, so the saving over salary above the NI threshold remains substantial even after accounting for the reduced allowance.

Q: What is the optimal salary if I cannot claim Employment Allowance? A: The most common approach is £9,100 or just above the LEL (£6,396), to avoid triggering employer NI while still securing a qualifying year for State Pension. You then take the remainder of your income as dividends. The exact optimal point depends on your corporation tax rate and whether the employer NI can be offset by the CT saving.

Q: Does my company pay corporation tax on profits before or after the director salary? A: After. The director's salary is a deductible business expense that reduces taxable profits before corporation tax is applied. This is one reason a modest salary can be efficient -- it reduces the CT bill.

Q: What corporation tax rate applies to my company? A: For 2026/27 -- 19% on profits below £50,000, 25% on profits above £250,000, and a graduated rate (effective marginal rate of 26.5%) on profits between those thresholds. The rate significantly affects how much the company benefits from a deductible salary versus retaining profit.

Q: Can I declare dividends at any time? A: Dividends must be declared when there are sufficient distributable reserves (post-tax profits). You cannot declare a dividend that exceeds retained profits. Keep proper dividend vouchers and board minutes -- HMRC can reclassify improperly documented dividends as salary.

Q: Is there a benefit to splitting shares with my spouse to pay them dividends? A: There can be, if your spouse has unused Personal Allowance or falls into a lower tax band. However, HMRC's settlement legislation can apply if arrangements are designed purely to divert income. A 50/50 shareholding in a genuine family business is generally accepted; complex share class structures may attract scrutiny.

Q: How do I actually pay myself dividends from my company? A: You hold a board meeting (even as sole director), pass a resolution to declare a dividend of a specific amount per share, and issue a dividend voucher. The dividend is then paid to your bank account. The paperwork is important even for small companies -- HMRC expects it.

Q: What if my company has no retained profits? A: You cannot pay a dividend. If the company is loss-making or has used all retained profits, any payment to you must be classified as salary (triggering NI) or a director's loan (which carries its own tax consequences if not repaid within nine months of the company's year-end).

Q: Should I take a larger salary to increase my mortgage borrowing capacity? A: This is a real practical consideration. Many mortgage lenders assess director income based on salary plus dividends, but some are more conservative and focus on salary alone. If you need to evidence higher income for a mortgage, it may be worth temporarily increasing your salary, despite the additional NI cost, to improve affordability assessments.