Comparison · Tax Planning · 2026/27
Salary vs Dividends for UK Directors 2026/27
The optimal way for a UK limited company director to extract profit changed materially with the Autumn Budget 2025: dividend tax rates rose to 10.75% (basic) and 35.75% (higher rate) from 6 April 2026. The salary + dividends strategy remains more tax-efficient than all-salary for most directors, but the margin has narrowed. This page gives you the full 2026/27 analysis: the maths at £60,000 company profit, the optimal salary level with and without Employment Allowance, the precise tax cost under each strategy, and the profit level at which a limited company beats a sole trader.
Autumn Budget 2025 — Dividend Rate Rise
From 6 April 2026 (tax year 2026/27), dividend tax rates increased: basic rate 8.75% → 10.75%; higher rate 33.75% → 35.75%. The additional rate (39.35%) is unchanged. The dividend allowance remains £500. All worked examples on this page use the new 2026/27 rates. If you are using figures from a prior year, check them against this page.
2026/27 Tax Rates at a Glance
| Item | Rate / Amount |
|---|---|
| Corporation tax (small profits, ≤£50k) | 19% |
| Corporation tax (marginal relief £50k–£250k) | 19%–25% blended |
| Personal allowance | £12,570 |
| Basic rate income tax band (taxable income) | 20% up to £37,700 taxable |
| Higher rate income tax | 40% above £50,270 gross |
| Employer NI (Class 1 secondary) | 15% above £5,000 salary |
| Employee NI (Class 1 primary) | 8% (£12,570–£50,270), 2% above |
| Dividend tax — basic rate | 10.75% (was 8.75%) |
| Dividend tax — higher rate | 35.75% (was 33.75%) |
| Dividend tax — additional rate | 39.35% (unchanged) |
| Dividend allowance | £500 |
| Employment Allowance | £10,500 (not available for sole director companies) |
Optimal Director Salary Strategy
Two common optimal salary points for 2026/27, depending on Employment Allowance eligibility:
- • Below secondary NI threshold — no employer NI
- • Below primary NI threshold — no employee NI
- • Below personal allowance — no income tax
- • Still qualifies for NI State Pension credit year (above LEL £6,396? — at £5,000 you do not get a qualifying year; consider £6,396 instead)
- • Corporation tax deduction on the salary cost
- • No income tax (within personal allowance)
- • No employee NI (at primary threshold)
- • Employer NI: (£12,570 - £5,000) × 15% = £1,135.50 — covered by EA
- • Qualifies for NI State Pension qualifying year
- • Larger CT deduction on the higher salary
Full Worked Example — £60,000 Company Profit
Comparing two strategies for extracting £60,000 of pre-salary, pre-tax company profit. Strategy A assumes Employment Allowance is available; Strategy B is all-salary.
Strategy A — £12,570 Salary + Dividends
| Company profit (before director salary) | £60,000 |
| Director salary (deducted — CT-deductible) | −£12,570 |
| Employer NI on salary (covered by Employment Allowance) | £0 |
| Taxable company profit (after salary) | £47,430 |
| Corporation tax @ 19% | −£9,011.70 |
| Available for dividend | £38,418.30 |
| Income tax on salary (within PA) | £0 |
| Employee NI on salary (at primary threshold) | £0 |
| Dividend allowance (first £500 tax-free) | £0 |
| Taxable dividends: £38,418 − £500 = £37,918 | − |
| Basic rate dividends: ~£37,200 @ 10.75% | ~−£3,999 |
| Higher rate dividends: ~£718 @ 35.75% | ~−£257 |
| Total director take-home (salary + net dividend) | ~£46,163 |
| Total tax (CT + dividend tax) | ~£13,268 |
| Effective total tax rate (tax / £60k profit) | ~22.1% |
Strategy B — All Salary £60,000
| Gross salary | £60,000 |
| Employer NI: 15% × (£60,000 − £5,000) | −£8,250 (company cost) |
| Total company outflow | £68,250 |
| Income tax: £7,540 (basic) + £3,892 (higher) | −£11,432 |
| Employee NI: £3,016 (basic) + £194 (upper) | −£3,210 |
| Net take-home salary | £45,358 |
| Total tax burden (IT + employee NI + employer NI) | £22,892 |
| Effective total tax rate (of £60k profit, before employer NI) | ~38.2% |
Tax at Various Profit Levels — 12-Row Table
Estimated total tax (CT + dividend tax) for Strategy A (£12,570 salary + dividends, Employment Allowance available) at different company profit levels. For illustration; check with an accountant for your precise figures.
| Company profit (pre-salary) | CT (19%) | Approx. div tax | Total tax | Net take-home | Effective rate |
|---|---|---|---|---|---|
| £20,000 | £1,412 | £593 | £2,005 | £17,995 | 10.0% |
| £25,000 | £2,362 | £1,029 | £3,391 | £21,609 | 13.6% |
| £30,000 | £3,312 | £1,464 | £4,776 | £25,224 | 15.9% |
| £35,000 | £4,262 | £1,899 | £6,161 | £28,839 | 17.6% |
| £40,000 | £5,212 | £2,335 | £7,547 | £32,453 | 18.9% |
| £50,000 | £7,112 | £3,205 | £10,317 | £39,683 | 20.6% |
| £60,000 | £9,012 | £4,256 | £13,268 | £46,732 | 22.1% |
| £75,000 | £11,862 | £8,599 | £20,461 | £54,539 | 27.3% |
| £100,000 | £16,612 | £15,839 | £32,451 | £67,549 | 32.5% |
| £120,000 | £20,412 | £21,630 | £42,042 | £77,958 | 35.0% |
| £150,000 | £26,112 | £30,317 | £56,429 | £93,571 | 37.6% |
| £200,000 | £35,612 | £46,209 | £81,821 | £118,179 | 40.9% |
Assumes Employment Allowance available; £12,570 salary; single director; no other income; England/Wales/NI rates. Corporation tax at 19% small profits rate (profits below £50,000); marginal relief applies £50k–£250k. At profits above £50,000, CT marginal relief means effective CT rate rises above 19% — figures are approximate.
Ltd Company vs Sole Trader — Break-Even Analysis
A sole trader pays income tax + Class 4 NI on all profits above the personal allowance. A limited company pays CT + dividend tax on extracted profits. The Ltd company also has annual accounting costs (typically £500–£1,500/year). The break-even profit level (where Ltd company saving covers the accounting cost) depends on the dividend tax rate:
| Profit level | Sole trader: IT + Class 4 NI | Ltd (salary + dividends): total tax | Ltd saving |
|---|---|---|---|
| £20,000 | ~£2,086 | ~£1,411 | ~£675 |
| £30,000 | ~£5,186 | ~£3,726 | ~£1,460 |
| £40,000 | ~£9,086 | ~£5,756 | ~£3,330 |
| £50,000 | ~£13,586 | ~£7,763 | ~£5,823 |
| £60,000 | ~£19,286 | ~£13,268 | ~£6,018 |
| £80,000 | ~£29,286 | ~£20,484 | ~£8,802 |
Figures are approximate, assuming England/Wales, single person, no other income. Sole trader Class 4 NI at 6% on profits £12,570–£50,270, 2% above (2026/27 rates). Ltd saving needs to exceed annual accountancy cost (£500–£1,500) to justify incorporation. At £30,000 profit the saving (~£1,460) barely covers accountancy — at £40,000+ it becomes clearly worthwhile for most sole traders.
Employment Allowance — £10,500 in 2026/27
The Employment Allowance allows eligible employers to reduce their annual employer NI bill by up to £10,500 in 2026/27 (raised from £5,000 in 2024/25 to £10,500 from April 2025). To qualify:
- Your Class 1 employer NI bill for the prior tax year must be £100,000 or less.
- You must have at least one employee who is not a director. Companies where the only person paid is the director-shareholder do not qualify.
- Connected companies share one Employment Allowance between them.
- The Allowance is claimed via your payroll software / RTI submission.
If you employ a spouse, family member, or any other employee, the company will almost certainly qualify — making the £12,570 director salary free of employer NI cost. For a sole director with no other employees, the optimal salary remains the secondary NI threshold level (£5,000 or the LEL of £6,396 for State Pension qualifying year purposes), because employer NI at 15% would apply above £5,000.