How Should a Director Pay Themselves in 2026/27?

Ten years ago, the gap between taking money out of your company as salary and taking it as dividends was enormous — wide enough that "just take the tax-free salary and dividend the rest" was genuinely sound advice for almost everyone. That gap has been shrinking, budget by budget, ever since. The dividend allowance has fallen from £5,000 to £500. Dividend tax rates have risen twice in the last two years. Employer National Insurance jumped to 15% in 2025. By 2026/27, for a lot of companies, the old rule of thumb doesn't hold up any more.

I still get asked the same question in almost every new client meeting: "So, salary or dividends — what should I be doing?" It's the right question. It just doesn't have a single right answer any more. The answer depends on your company's profit, whether you employ anyone else, what you're trying to build towards — a pension, a mortgage application, a bigger salary sacrifice — and how much of a buffer you want against HMRC scrutiny.

This guide walks through the whole decision, with real numbers for 2026/27, so you can see exactly where the balance currently sits and why.

Salary or Dividends – Which Is More Tax Efficient?

Why the Old Rules of Thumb No Longer Apply

The advice that circulated for years — take a tiny salary, dividend everything else — was built on a set of rates that simply don't exist any more. Dividend tax at 7.5% basic rate, a £5,000 tax-free dividend allowance, employer NI at 13.8%: none of it survives into 2026/27. What's replaced it is a system where salary and dividends sit much closer together in cost, and where the "right" answer genuinely varies from one company to the next.

The Three Layers of Tax at Play

Every pound your company earns passes through up to three layers of tax before it lands in your pocket. Corporation tax hits company profit first, at 19%, 25%, or the marginal rate in between. Then, depending on how you extract it, either income tax and employee National Insurance apply to salary, or dividend tax applies to what's left after corporation tax has already been deducted. Employer National Insurance sits alongside salary as an additional company cost, on top of the salary itself. Get the balance between these three layers wrong, and you're simply handing HMRC more than you need to.

It Depends on Your Company, Not Just the Rates

This is the point I try to get across in every client conversation: there is no universal answer, because the calculation depends on things specific to your company — whether you have other employees and can claim Employment Allowance, what your profit level is relative to the corporation tax thresholds, and what you personally need from a pension or mortgage perspective. Two directors with identical income needs can land on genuinely different optimal strategies.

Salary vs Dividends – Worked Example

Numbers make this real, so let's take a typical sole-director company — no other staff, so no Employment Allowance available — with a total budget of £50,000 to extract from the business this year, and see how two strategies compare.

Option A: Salary Only

To keep the total cost to the company at £50,000, including employer National Insurance, the salary works out at roughly £44,130. Employer NI on that, above the £5,000 secondary threshold, comes to around £5,870 — bringing the total cost to £50,000. On the personal side, after the £12,570 personal allowance, £31,560 is taxable at 20% income tax (£6,312), and the same amount attracts employee National Insurance at 8% (£2,525). The director takes home roughly £35,290.

Option B: Low Salary Plus Dividends

Now take a salary of £12,570 — covered entirely by the personal allowance, and with no employee or employer National Insurance due at that level. The employer NI cost here is about £1,135 (on the portion above the £5,000 secondary threshold), bringing the salary package to roughly £13,705. That leaves £36,295 of the £50,000 budget as company profit, taxed at 19% corporation tax (since this sole example sits comfortably under the £50,000 small profits threshold) — a bill of around £6,900 — leaving roughly £29,400 available to pay as a dividend. After the £500 dividend allowance, the rest is taxed at the 10.75% basic dividend rate, coming to about £3,105. The director takes home the £12,570 salary in full, plus a net dividend of around £26,290 — a total of roughly £38,860.

Comparing the Two

Same £50,000 cost to the company. Roughly £35,290 in Option A versus roughly £38,860 in Option B — a difference of around £3,570 in favour of the salary-plus-dividends route. Dividends still win here, but notice how much closer these numbers sit than they would have five years ago. This is the "gap has narrowed" story playing out in real figures, not just as a talking point.

What Changes at Different Profit Levels

Push the company's profit up into the marginal relief band, and the corporation tax on that dividend pot rises towards 26.5%, narrowing the gap further. Add a second employee earning enough to unlock Employment Allowance, and the maths tilts back towards salary, because the first £10,500 of employer NI simply disappears. This is exactly why we run the actual numbers for each client rather than applying a blanket rule — the "right" salary and dividend split for a growing company with staff looks nothing like the right split for a one-person consultancy.

How Much Salary Should a Limited Company Director Take?

The Lower Earnings Limit – £6,708

Earn at least this much, and you get a qualifying year towards your State Pension, even though no National Insurance is actually due below the Primary Threshold. Set your salary below this level, and you're quietly giving up a full year of state pension entitlement for no tax saving at all — a mistake I see more often than I'd like.

The Primary Threshold – £12,570

This is where employee National Insurance starts, and it's aligned with the personal allowance, meaning a salary set exactly here attracts no income tax and no employee NI whatsoever. It's the most common starting point we recommend for sole-director companies.

Why Employment Allowance Changes the Answer

Employment Allowance can wipe out up to £10,500 of employer National Insurance a year — but it isn't available to a company whose only employee is a director paid above the secondary threshold. If your company has a second employee earning enough to qualify, a higher salary suddenly costs the company far less in employer NI than the sole-director scenario above, and the balance can genuinely shift towards more salary.

Our General Starting Point for 2026/27

For most sole-director companies without other staff, £12,570 remains a sensible default — it uses the personal allowance in full, avoids employee NI entirely, and keeps employer NI modest. But "sensible default" isn't the same as "right for you," and we review this figure with every client each year, because thresholds move and circumstances change.

When Is Taking More Salary Better Than Dividends?

When Employment Allowance Is Available

If your company already has staff and qualifies for the full £10,500 Employment Allowance, additional salary for the director can be added at a genuinely low marginal employer NI cost, changing the calculation meaningfully.

When You're Maximising Pension Contributions

Salary counts as relevant earnings for personal pension contributions. Dividends don't. A director wanting to make a large personal pension contribution — rather than an employer contribution direct from the company — needs enough salary to support it.

When You Need to Build a Mortgage or Benefits Case

Lenders and some benefit calculations look far more favourably on a consistent, provable salary than on variable dividend income, particularly for directors with only one or two years of trading history. I've had clients take a higher salary specifically for the twelve months before a mortgage application, purely to present cleaner numbers to an underwriter.

When Statutory Pay or State Pension Record Matters

Statutory sick pay, maternity pay, and your ongoing state pension record are all built on salary, not dividends. A director planning parental leave in the near future has a genuine reason to keep salary higher than the bare tax-efficient minimum.

Can I Take Dividends Instead of Salary?

The Case for a Dividends-Only Approach

On paper, taking everything as dividends and no salary at all looks appealing — no PAYE to run, no employee or employer NI at all. For a director with other sources of relevant earnings for pension purposes, or genuinely no interest in building a state pension record, it can occasionally make sense.

Why We Rarely Recommend It

In practice, a dividends-only approach forfeits your personal allowance entirely against salary (you'd still use it against dividend income, but you lose the NI-free zone salary offers), builds no state pension entitlement for the year, and can look unusual on a mortgage application. For the vast majority of directors, a modest salary alongside dividends outperforms a dividends-only strategy on every measure that matters.

What HMRC Thinks About Zero-Salary Directors

HMRC doesn't prohibit it, but a company with no salaried directors at all, run purely through dividends year after year, sits slightly outside the norm — and "slightly outside the norm" is generally somewhere I'd rather my clients weren't, all else being equal.

How Much Dividend Can I Take From My Limited Company?

Distributable Reserves – The Legal Limit

A dividend can only be paid out of realised, accumulated profits after corporation tax — commonly called distributable reserves. It isn't a matter of how much cash is sitting in the bank account. A company can have plenty of cash and still lack the reserves to legally support a dividend, if, say, a large invoice is still outstanding or a loan needs repaying.

What Happens If You Overpay a Dividend

Pay out more than your reserves support, and the dividend is technically unlawful. HMRC can reclassify the excess as a director's loan, bringing Section 455 tax and potentially a personal benefit-in-kind charge into play — an outcome nobody wants to discover eighteen months after the fact at year-end review.

Checking Reserves Before You Pay

This is exactly why we ask clients to check in with us before a significant dividend payment, particularly mid-year, rather than after. A quick review of up-to-date management accounts takes minutes and avoids a genuinely expensive mistake.

How Are Dividends Taxed in 2026/27?

The £500 Dividend Allowance

Every individual gets the first £500 of dividend income tax-free each year, regardless of what tax band they're otherwise in. It's a fraction of what it used to be — £5,000 as recently as 2017/18 — but it's still worth using, particularly for a spouse or family member with little other income.

The Three Dividend Tax Rates

Above the allowance, dividend income is taxed at 10.75% within the basic rate band, 35.75% within the higher rate band, and 39.35% within the additional rate band for 2026/27 — the first two of those having risen by two percentage points from the previous year.

How Dividends Stack on Top of Other Income

Dividends are always treated as the top slice of your income, stacked above salary, savings and any other earnings. That means the tax band your dividends fall into depends on everything else you've already earned in the year — a director with rental income or a second job may find their dividends taxed at a higher rate than they expected, purely because of income from elsewhere pushing them up the scale first.

Do I Need to Pay Tax on Dividends?

When You Won't Owe Anything

If your total dividend income for the tax year sits within the £500 allowance, there's nothing to pay and, in most cases, nothing extra to report.

When You Will

Above £500, tax is due at the appropriate rate for your income band, and it needs declaring through Self Assessment.

How and When You Pay It

Dividend tax is paid alongside the rest of your Self Assessment liability, by 31 January following the end of the tax year. If your total tax bill crosses certain thresholds, HMRC may also ask for payments on account towards the following year — worth planning cash flow around, rather than discovering in January.

How Do I Declare Dividends?

Board Minutes

Every dividend needs a board minute recording the decision to declare it, dated at or before the point of payment. It doesn't need to be lengthy — a short, properly dated record is enough — but it does need to exist.

Dividend Vouchers

Alongside the minute, each shareholder receiving a dividend needs a voucher showing the date, the company, the amount, and the shareholder's details. This is the paper trail that supports the dividend if HMRC ever asks questions.

Common Paperwork Mistakes We See

The single most common issue we come across is dividends paid throughout the year with no minutes or vouchers at all, reconstructed retrospectively at year end once the accountant asks for them. It's an easy trap to avoid — draft the paperwork at the time you pay yourself, not the following February — and it's one of the simplest things we help clients build into a routine.

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Salary and dividends aren't a decision you make once and forget. Thresholds shift every April, your company's profit changes year to year, and what worked for you in 2024/25 may not be the best answer for 2026/27. If you'd like us to run your own numbers — factoring in your actual profit, your pension plans, and whether Employment Allowance applies to you — get in touch with the team at Cannon Accountants. It's worth revisiting every year, and it's exactly the kind of review that pays for itself.

This is one piece of a much bigger picture. For the full view of how corporation tax, expenses, director's loans, pensions and everything else fits together for 2026/27, head back to our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

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Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.