Dividend vs salary 2026/27: finding the optimal director pay mix

Dividend vs salary 2026/27: finding the optimal director pay mix


 

Why the mix matters more than the amount

For the owner of a limited company, how you take money out matters almost as much as how much the business makes. Salary is taxed through PAYE and is deductible against corporation tax; dividends come from after-tax profits and carry their own tax rates. Get the mix right and you keep thousands a year that would otherwise go to HMRC. Get it wrong and you pay National Insurance you never needed to pay. With the main 2026/27 thresholds frozen, the maths is stable enough to plan around, though you should always confirm current rates at gov.uk before acting.

Why salary still earns its place

It is tempting to take everything as dividends, but salary does useful work. Salary up to the £12,570 personal allowance is free of income tax and, as a deductible expense, it saves corporation tax at 19% or 25% on every pound. A salary at or above the lower earnings limit also protects the director's qualifying year towards the state pension and keeps entitlement to certain contributory benefits. The trade-off is National Insurance: employer NIC at 15% applies above the £5,000 secondary threshold, and employee NIC applies above the primary threshold, so every extra pound of salary above those points carries a NIC cost that dividends avoid.

The 2026/27 numbers that drive the decision

The key figures for the year:

  • Personal allowance: £12,570. Basic rate band: £37,700 above the allowance, so £50,270 in total.
  • Employer National Insurance: 15% on salary above £5,000. The Employment Allowance, worth £10,500 a year since April 2025, can cover this for companies with employees beyond the director, which changes the calculation significantly.
  • Dividend allowance: the first £500 of dividends tax-free each year.
  • Dividend tax rates: 8.75% within the basic rate band, 33.75% at the higher rate, 39.15% at the additional rate.
  • Corporation tax: 19% on profits up to £50,000, 25% above £250,000, with marginal relief between.

Two salary levels dominate the planning conversation. A £5,000 salary attracts no employer or employee NIC at all. A £12,570 salary uses the full personal allowance and saves corporation tax on the extra £7,570, but costs roughly £1,136 in employer NIC on that slice. Which wins depends on the corporation tax rate the company pays and whether the Employment Allowance is available.

A worked example: extracting £50,000

Take a company with £50,000 of profit to extract and no other income for the director.

Option A, the classic mix: £12,570 salary plus dividends for the rest. The salary saves corporation tax of about £2,388 at 19%, costs about £1,136 in employer NIC, and the dividends fall within the basic rate band, taxed at 8.75% after the £500 allowance. Total tax on the extraction lands around £7,900.

Option B, the minimal salary: £5,000 salary plus dividends. No NIC cost, slightly less corporation tax saved, and a touch more dividend tax because less of the basic rate band is used by salary. Total tax lands around £8,100.

The classic mix still edges it for a basic-rate director, by a couple of hundred pounds. But add employees and the Employment Allowance into the picture, and the £12,570 salary becomes clearly better, because the employer NIC is covered by the allowance while the corporation tax saving is banked in full.

Traps that catch directors out

  • Dividends require distributable profits. Paying dividends from a loss-making company creates illegal dividends that must be repaid, whatever the tax position.
  • Salary must actually be paid through PAYE with RTI submissions. A journal entry alone does not create a salary.
  • Other income changes everything. A director with rental income or a second job may already use the personal allowance, which flips the optimal mix.
  • The director's loan account is not a third way to extract cash. Overdrawn loan accounts trigger their own tax charges.
  • Pension contributions paid by the company usually beat both salary and dividends for money you do not need to spend now, saving corporation tax with no NIC at either end.

Review the mix every year

The optimal mix is not set and forget. Thresholds, allowances and NIC rates move with Budgets, and your own circumstances move faster: a new employee unlocks the Employment Allowance, a buy-to-let uses up the personal allowance, a bumper year pushes you into higher dividend rates. Revisit the salary level each April, run the numbers before declaring large dividends, and minute the dividend decisions properly.

Director remuneration is one of the highest-value conversations an accountant has with a client, and it takes ten minutes with the right figures. Finex Outsourcing is a Global Business Services provider whose tax compliance services support UK companies and their advisers with year-round planning. The official rules on taking money from a limited company are at gov.uk.


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