Director's salary vs dividends in 2026/27: the plain-practical breakdown

Every company director faces the same question: should I pay myself a salary, dividends, or a mix of the two? The two routes are taxed completely differently, and the most efficient mix depends on the current thresholds and rates. Here is the breakdown in plain terms.

How salary is taxed

Salary goes through PAYE and attracts both income tax and national insurance. For 2026/27 the personal allowance is 12,570 pounds, so the first 12,570 of salary is income-tax free. Employee national insurance is 8 per cent on earnings between 12,570 and 50,270 pounds, and 2 per cent above that. The company also pays employer national insurance at 15 per cent on salary above the secondary threshold of 5,000 pounds. The one consolation: salary and employer national insurance are both deductible against corporation tax, which softens the cost.

The tax-efficient salary level

For many directors the starting point is a salary of 12,570 pounds. At that level there is no income tax and no employee national insurance. The company still pays employer national insurance of 1,135.50 pounds on the slice above 5,000 pounds, but that cost is deductible against corporation tax. If your company can claim the 10,500 pound Employment Allowance, the employer national insurance disappears entirely, though note that a company with a single director and no other employees generally cannot claim it. Because the employer NIC cost is softened by corporation tax relief, a salary at this level still usually beats taking the same amount as dividends.

How dividends are taxed

Dividends are paid out of profits that have already suffered corporation tax, 19 per cent up to 50,000 pounds of profits, 25 per cent above 250,000, with marginal relief in between. There is no national insurance on dividends at all, which is their big advantage. But dividends carry their own income tax rates, and these changed for 2026/27.

Everyone gets a dividend allowance of 500 pounds taxed at zero, and this sits on top of the personal allowance. Above that, the 2026/27 dividend tax rates are 10.75 per cent for basic-rate taxpayers, 35.75 per cent for higher-rate taxpayers, and 39.35 per cent for additional-rate taxpayers. One detail worth knowing: the 500 pound allowance is a nil-rate band, not a deduction, so it still uses up 500 pounds of your tax band.

The paperwork: distributable profits and dividend vouchers

Dividends are not just a bank transfer with a hopeful description. A company can only pay dividends out of distributable profits, meaning profits after tax that have not already been allocated. If there are no profits, there is no dividend, and money taken anyway is treated as a director's loan, which brings its own tax charge, currently 35.75 per cent if still outstanding nine months and a day after the year end.

Every dividend needs paperwork: board minutes recording the decision and a dividend voucher for each shareholder showing the company name, the shareholder, the amount, and the date. Keep them filed with your company records.

A worked example for a basic-rate director

Take a director who wants 50,270 pounds of personal income for 2026/27, the top of the basic-rate band, with no other income and profits taxed at the 19 per cent small-profits rate. A common structure is a salary of 12,570 pounds and dividends of 37,700 pounds.

The salary costs no income tax and no employee national insurance. The company pays 1,135.50 pounds of employer national insurance, which after 19 per cent corporation tax relief costs roughly 920 pounds net. The dividends: 500 pounds at zero, and 37,200 pounds at 10.75 per cent, giving dividend tax of 3,999 pounds.

Now compare that first 12,570 pounds slice. Taken as salary it cost the company roughly 920 pounds in net employer national insurance, and the director received it tax-free. Taken as dividends, the same 12,570 pounds, after the allowance is used, would carry dividend tax of about 1,298 pounds. The salary route wins on that slice by roughly 380 pounds. Getting this mix right each year is one of the routine jobs covered by corporation tax and self assessment support, and the bookkeeping underneath it is exactly what accounting outsourcing services handle for busy directors.

When the answer changes

The standard mix is a starting point, not a rule. If you are a higher-rate taxpayer, dividends are taxed at 35.75 per cent while extra salary faces 40 per cent income tax plus 2 per cent employee national insurance, so the balance shifts and needs recalculating. If the company has no distributable profits, perhaps after a loss-making year, dividends are simply not available and salary or a director's loan are the only routes. If you work inside IR35 or off-payroll rules apply, most of your income is deemed employment income and the dividend route largely disappears. And pension contributions change the picture too: employer pension contributions are deductible for the company and carry no national insurance, so funding your pension through the company is often more efficient than either salary or dividends.

Revisit the mix once a year, before the tax year starts, and whenever your income level or the company's profits change materially. The thresholds are frozen until 2031, but the dividend rates moved this year, which is a reminder that the optimal answer is only ever optimal for the current rules.