Pillar Guide · Updated June 2026
UK Company Director Tax Guide 2026/27: Salary, Dividends & More
Running your own limited company gives you control over how — and how much — tax you pay. The way a director-shareholder structures salary, dividends, pension contributions and expenses can change the effective tax rate on the same profit by twenty percentage points or more. This guide walks through the full 2026/27 picture: the optimal salary, extracting profit via dividends, the corporation tax marginal-relief trap, employer pension contributions, directors loans and the dreaded S455 charge, benefits in kind, when incorporation makes sense, IR35 for personal service companies, and how payments on account affect your cash flow.
Optimal Director Salary: Why £12,570
The starting point for most director-shareholders is a salary set at the Personal Allowance of £12,570. At this level you pay no income tax and no employee National Insurance (the employee NI primary threshold is also £12,570 in 2026/27). The salary is an allowable business expense, so it reduces the company's taxable profit and therefore its corporation tax bill.
There is a wrinkle: the employer (secondary) NI threshold is just £5,000, so employer NI at 15% is due on the £7,570 of salary above that — roughly £1,136 per director. But the corporation tax relief on a £12,570 salary at 19% is £2,388, comfortably exceeding the employer NI cost. The net position is positive, which is why the full Personal Allowance salary remains the default.
Employment Allowance: companies with more than one employee can claim the £10,500 Employment Allowance, which wipes out the employer NI entirely. A single-director company with no other employees generally cannot claim it. If you have a co-director or employee on the payroll, you can often run two £12,570 salaries with the employer NI offset by the allowance — a more efficient structure.
Importantly, a £12,570 salary also counts as a qualifying year for the State Pension, because earnings above the £6,500 Lower Earnings Limit credit you with a NI record even though no NI is actually paid.
Dividend Extraction
Once the salary is set, the remaining profit is usually extracted as dividends. Dividends can only be paid from distributable (post-tax) reserves and must be supported by a board minute and dividend voucher. The 2026/27 dividend tax rates, after the £500 dividend allowance, are:
| Band | Total income | Dividend rate |
|---|---|---|
| Allowance | First £500 of dividends | 0% |
| Basic | Up to £50,270 | 10.75% |
| Higher | £50,271–£125,140 | 35.75% |
| Additional | Above £125,140 | 39.35% |
With a £12,570 salary, the entire £37,700 basic-rate band is available for dividends taxed at just 10.75%. Drawing dividends up to £50,270 of total income keeps the personal tax bill very low. Above that, the jump to 35.75% makes higher-rate dividends much more expensive, which is where pension contributions and profit retention come in.
The dividend vs salary calculator models the optimal split for your profit level, and the dividend tax calculator shows the exact liability on a given dividend.
Corporation Tax: 19%, 25% and the 26.5% Marginal Trap
Before any dividend can be paid, the company pays corporation tax on its profits. The 2026/27 rates are not a simple flat figure:
| Profit band | Effective rate |
|---|---|
| £0 – £50,000 (small profits rate) | 19% |
| £50,001 – £250,000 (marginal relief) | 26.5% on the slice |
| Above £250,000 (main rate) | 25% |
The counter-intuitive part is the 26.5% marginal rate on profits between £50,000 and £250,000. Because marginal relief gradually withdraws the benefit of the 19% rate, each extra pound of profit in this band is effectively taxed at 26.5% — higher than the 25% main rate. Directors whose profits land in this zone often consider an employer pension contribution to bring profit below £50,000, where the rate drops back to 19%.
These thresholds are divided by the number of associated companies. If you control two trading companies, the £50,000 and £250,000 limits are halved to £25,000 and £125,000 each, which can push profits into the marginal band sooner.
Estimate your bill with the corporation tax calculator.
Employer Pension Contributions — The Most Efficient Extraction
For profit you do not need to spend now, an employer pension contribution is usually the most tax-efficient route out of the company:
- The contribution is an allowable expense, saving 19–26.5% corporation tax.
- No employer or employee National Insurance is due.
- It is not personal income, so it does not consume your basic-rate band or push dividends into higher rate.
- It grows tax-free inside the pension; 25% (up to the £268,275 Lump Sum Allowance) is tax-free on withdrawal.
The annual allowance is £60,000 (tapered for very high earners), and you can carry forward unused allowance from the three previous tax years if you had a pension in those years. Unlike personal contributions, employer contributions are not limited by your salary level — a director on a £12,570 salary can still receive a large company contribution, provided it meets the “wholly and exclusively” test for the trade.
The only real downside is liquidity: pension money is locked until age 57 (rising to 58 in 2028). For directors over 50, or anyone with surplus profit beyond immediate needs, the pension route comfortably beats higher-rate dividends.
Directors Loan Account and the S455 Charge
A directors loan account (DLA) tracks money flowing between you and the company that is not salary, dividend or genuine expense. If you take money out faster than you declare dividends, the DLA becomes overdrawn — you owe the company.
Two tax consequences follow an overdrawn DLA:
- S455 tax: if the overdrawn balance is not cleared within nine months and one day of the company year-end, the company pays a S455 charge of 35.75% of the outstanding amount. This is refundable once the loan is repaid, but the refund is delayed until nine months after the end of the year in which repayment happens — a significant cash-flow cost.
- Benefit in kind: if the overdrawn balance exceeds £10,000 at any point in the year, the difference between the official rate of interest and any interest you actually pay is a taxable benefit, reported on P11D, with Class 1A employer NI due.
Beware “bed and breakfasting” — repaying a loan just before the nine-month deadline and re-borrowing shortly after. HMRC's anti-avoidance rules can deny the S455 refund where £5,000 or more is repaid and a similar amount redrawn within 30 days.
A DLA can also be in credit — where the company owes you (for example, money you lent it at start-up). You can withdraw a credit balance tax-free at any time, and the company can even pay you interest on it (taxable as savings income, with the Personal Savings Allowance available).
Benefits in Kind for Directors
Most benefits a company provides to a director are taxable and reported on form P11D, with Class 1A employer NI at 15%. But several remain tax-free or very low-cost:
| Benefit | Tax treatment |
|---|---|
| Employer pension contribution | Tax-free |
| Electric company car | 3% BIK in 2026/27 (rising 1%/yr) |
| Trivial benefits | Tax-free up to £50 each, £300/yr cap for close-company directors |
| Annual staff event | Tax-free up to £150 per head |
| One mobile phone | Tax-free |
| Working-from-home allowance | £6/week tax-free |
| Petrol/diesel company car | High BIK — usually inefficient |
The standout planning item is the electric company car: at a 3% benefit-in-kind rate, an EV bought through the company (with full corporation tax relief via capital allowances) is dramatically more efficient than buying personally from taxed dividends. See the company car benefit-in-kind guide for the detail.
When to Incorporate
Operating as a sole trader is simpler, but a limited company offers tax flexibility and limited liability. As a rough guide, incorporation starts to pay off once profits exceed the amount you need to draw for living costs — frequently quoted in the £30,000–£50,000 range, though the precise break-even depends on how much profit you can leave in the company or route into a pension.
Advantages of incorporating: retained profit taxed at 19% rather than up to 45% personally; salary/dividend split to minimise NI; employer pension flexibility; limited liability protection; potential credibility with larger clients.
Costs and downsides: statutory accounts, a corporation tax return, Companies House confirmation statement and filings, payroll (RTI), higher accountancy fees (often £1,000–£2,500/year), public disclosure of director details, and the administrative discipline of keeping company and personal money separate. If you draw every penny of profit each year, the tax saving from incorporation can be marginal once the extra costs are counted.
IR35 for Personal Service Companies
If you provide your services through a personal service company (PSC), the off-payroll working rules (IR35) determine whether you are genuinely in business on your own account, or effectively a disguised employee of your client.
- Medium/large private-sector and all public-sector clients:since April 2021 the client assesses your IR35 status and, if “inside”, deducts PAYE and NI before paying your company.
- Small private-sector clients: your PSC remains responsible for assessing its own status.
Inside IR35, the income is largely taxed as employment income through a deemed payment, which removes the dividend advantage and makes the PSC structure far less attractive. Outside IR35, normal salary/dividend planning applies. Status hinges on factors like the right of substitution, control over how the work is done, and mutuality of obligation.
See the IR35 explained guide for a full breakdown, and the inside vs outside IR35 comparison for the take-home difference.
Payments on Account
Salary is taxed at source under PAYE, but dividends are not. If your personal Self Assessment liability (mostly dividend tax) exceeds £1,000 and less than 80% of your tax is collected at source, HMRC requires payments on accounttowards next year's bill.
Each payment on account is 50% of the prior year's liability, due on 31 January and 31 July. In the first year you draw significant dividends this can mean paying 150% of a year's tax in one January — the balancing payment for the year just ended plus the first payment on account for the next. Budget for this cash-flow shock; many directors keep dividend tax in a separate savings pot.
If your income falls, you can apply to reduce your payments on account — but if you under-pay, HMRC charges interest on the shortfall.
Worked Example: £80,000 Profit Before Salary
A sole director with £80,000 of profit before any salary, wanting to draw as much as possible while staying tax-efficient:
- Salary £12,570: no income tax, no employee NI; ~£1,136 employer NI; corporation tax relief ~£2,388. Reduces pre-tax profit to £66,294 (£80,000 − £12,570 − £1,136).
- Corporation tax on £66,294: roughly £12,596 at the small-profits rate up to £50,000 (£9,500) plus 26.5% on the £16,294 above (£4,318), leaving ~£53,698 distributable.
- Dividends to the higher-rate threshold: £37,700 of dividends at 10.75% (less the £500 allowance) costs ~£3,999 personal tax. Total income £50,270 stays in basic rate.
- Remaining ~£15,998: rather than draw it as 35.75% higher-rate dividends, route it into an employer pension contribution — saving the 26.5% corporation tax it would otherwise suffer on the marginal slice and avoiding higher-rate dividend tax entirely.
The exact figures depend on the order of contributions and reliefs, so model your own numbers with the dividend vs salary calculator. The principle holds: salary to the Personal Allowance, basic-rate dividends, then pension for the rest.