Choosing the right mix of salary and dividends can affect both your personal tax position and your limited company’s overall tax costs. For 2026/27, directors need to consider Income Tax, National Insurance, Corporation Tax, dividend tax rates and whether the company qualifies for Employment Allowance. This guide explains the main factors to consider when planning director remuneration.
Key Director Tax Rates and Allowances for 2026/27
Starting on 6 April 2026, here’s a quick overview of the key figures directors and shareholders in England, Wales and Northern Ireland should be aware of:
- Personal Allowance: £12,570
- Dividend Allowance: £500
- Basic rate band: £37,700 of taxable income
- Higher-rate threshold: £50,270 for someone entitled to the standard Personal Allowance
- Additional-rate threshold: £125,140
- Dividend basic rate: 10.75%
- Dividend higher rate: 35.75%
- Dividend additional rate: 39.35%
Scottish Income Tax rates differ for salary and other non-savings income, although UK dividend tax rates apply to dividend income.
Why Combining Directors Salary and Dividends is a Smart Tax-Saving Strategy
For directors who are also shareholders, a combination of salary and dividends can still be tax-efficient, but there is no single salary-and-dividend mix that is best for every company. The right approach depends on company profits, other personal income, National Insurance, Corporation Tax, Employment Allowance eligibility and the amount of profit legally available for dividends.
Dividends can only be paid from available company profits and must be properly declared and documented. They are not deductible when calculating the company’s Corporation Tax.
- Tax-Deductible Salary: Paying yourself a salary reduces your company’s taxable profits. If family members help in the business, you can pay them a salary, which could also count as a deductible expense for your company.
- No NICs on Dividends: Dividends don’t come with National Insurance Contributions (NICs), so you avoid the additional charges that typically apply to salaries.
- Flexibility with Profits: Keeping some profits in the company gives you the option to access them later. This might even qualify for Business Asset Disposal Relief when you sell or close the business, though recent changes have made this slightly less appealing.
- National Insurance record: Paying salary at an appropriate level can help protect a director’s National Insurance record. For 2026/27, the Lower Earnings Limit is £6,708 a year, while the employee Primary Threshold is £12,570.
No NI Employment Allowance – A Tax-Efficient Approach
If a limited company has just one director and that director is the only employee liable for employer Class 1 National Insurance, the company cannot normally claim Employment Allowance.
For 2026/27, the employer National Insurance Secondary Threshold is £5,000 a year and the standard employer National Insurance rate is 15%. The employee Primary Threshold remains £12,570.
Because salary can reduce taxable company profits but may create employer National Insurance, the most tax-efficient salary depends on the company’s circumstances rather than one standard figure.
Dividends above any available Personal Allowance and the £500 Dividend Allowance may be taxable. For 2026/27, the dividend tax rates are 10.75%, 35.75% and 39.35%, depending on the shareholder’s tax band. See our guide to UK dividend tax rates for 2026/27 for the current rates and allowances.
Option 2: Qualifying for the NI Employment Allowance
A company may qualify for Employment Allowance where it meets the normal eligibility conditions and more than one employee or director is paid above the relevant Secondary Threshold.
For 2026/27, Employment Allowance can reduce eligible employer National Insurance liabilities by up to £10,500.
A salary of £12,570 is at the employee National Insurance Primary Threshold for 2026/27, but whether that salary is appropriate depends on the company’s Employment Allowance position, Corporation Tax rate, other employees and the director’s wider tax circumstances.
- Salary example: £12,570 per year, subject to the company’s overall circumstances.
- Dividends: The amount should be considered separately based on available distributable profits and the director’s personal tax position.
Salary is generally deductible when calculating company profits where the normal business-expense conditions are met, whereas dividends are paid from post-tax profits. The overall tax result therefore needs to consider Corporation Tax, employer National Insurance and the director’s personal tax position together.
Alternative Tax-Efficient Ways to Extract Profits
Looking to get creative with how you extract profits? Here are a few more strategies:
- Spread Dividends Across Tax Years: This can help you make better use of allowances and lower tax bands.
- Pension Contributions: Have your company contribute to your pension it’s a tax-deductible expense for the business and not taxable for you.
- End-of-Year Tax Planning: As the tax year ends, take a moment to review your financial situation. This will help you decide whether it’s better to take additional dividends now or hold off until the next tax year.
Director Salary and Dividend Planning for 2026/27
The right salary-and-dividend strategy depends on the circumstances of both the company and the director. Employment Allowance eligibility, company profits, Corporation Tax, other income, pension contributions and available distributable profits can all affect the outcome.
Reviewing the position before taking dividends or fixing the director’s salary can help avoid unnecessary tax and compliance problems.
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