Salary or dividends 2026/27: the most tax-efficient director pay
For most one-director companies in 2026/27, a £12,570 salary plus dividends beats a £5,000 salary or no salary at all. Employer NI at 15%, corporation tax at 19% to 25% and dividend tax at 10.75%, with a worked example at £60,000 profit.
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For most limited companies with one director and no other income, the most tax-efficient pay in 2026/27 is a salary of £12,570 and the rest of the profit as dividends. The salary is free of income tax and employee National Insurance, and the corporation tax it saves is more than the £1,135.50 of employer National Insurance it costs.
Law as of 11 November 2026
Salary and employer National Insurance are costs of the company and reduce its taxable profit (Corporation Tax Act 2009 ss. 54 and 1302). Dividends are paid out of profit after corporation tax, only from profits available for distribution, and are not a cost for corporation tax (Companies Act 2006 s. 830). The 2026/27 dividend rates are in Finance Act 2026 s. 4, the corporation tax rates in Finance Act 2026 ss. 11 and 12.
The 2026/27 figures that decide it
| Figure | 2026/27 |
|---|---|
| Personal Allowance (income tax at 0%) | £12,570 |
| Lower Earnings Limit (counts for your State Pension) | £6,708 a year |
| Primary Threshold (employee NI starts) | £12,570 a year |
| Employee NI | 8% from £12,570 to £50,270, 2% above |
| Secondary Threshold (employer NI starts) | £5,000 a year |
| Employer NI | 15% above £5,000 |
| Employment Allowance | up to £10,500 a year |
| Corporation tax | 19% up to £50,000 profit, 25% above £250,000, marginal relief in between |
| Dividend allowance | £500 |
| Dividend tax | 10.75% basic rate, 35.75% higher rate, 39.35% additional rate |
| Higher rate threshold (salary plus dividends) | £50,270 |
Legal basis: Finance Act 2026 ss. 4, 10, 11 and 12; National Insurance Contributions (Secondary Class 1 Contributions) Act 2025; HMRC rates and thresholds for employers 2026 to 2027. The corporation tax rates and limits are the same for the financial years starting on 1 April 2026 and 1 April 2027.
How salary and dividends are taxed
- Salary goes through the company's payroll (PAYE). The company deducts it, and the employer NI on it, from its profit before corporation tax. You pay income tax and employee NI on it. For directors, NI is worked out on annual earnings, not on each pay period.
- Dividends come out of profit after corporation tax. The company gets no tax relief for them. You pay dividend tax above your allowances, and no National Insurance.
- The order of your income: salary uses your Personal Allowance first. Dividends sit on top. Dividends that fall inside an unused Personal Allowance are taxed at 0%, and so is the £500 dividend allowance.
Why £12,570 is the best salary
Take £115 of company profit and compare what reaches you:
| Salary level | £115 of profit paid as salary | £115 of profit paid as dividends | Better |
|---|---|---|---|
| Up to £5,000 | £115 salary, no NI, no tax: you keep £115 | £115 − 19% corporation tax = £93.15, at 0%: you keep £93.15 | Salary |
| £5,000 to £12,570 | £100 salary + £15 employer NI: you keep £100 | £93.15 at 0% inside the Personal Allowance: you keep £93.15 | Salary |
| Above £12,570 | £100 salary − 20% income tax − 8% employee NI: you keep £72 | £93.15 − 10.75% dividend tax: you keep £83.14 | Dividends |
Between £5,000 and £12,570 the company pays 15% employer NI, but salary and NI together cut corporation tax by 19% or more, so the salary still wins. Above £12,570 income tax and employee NI start, and dividends win. At a corporation tax rate of 25%, or in the marginal relief band, the salary wins by even more, because each pound of salary saves more corporation tax.
A salary of £12,570 also gives you a qualifying year for the State Pension, because it is above the Lower Earnings Limit of £6,708. You pay no employee NI on it, yet you are treated as having paid (Social Security Contributions and Benefits Act 1992 s. 6A). Paid monthly, it is £1,047.50 a month.
Worked example: £60,000 profit, one director
Sam is the only director and shareholder of a company in England. Before Sam's pay, the company makes £60,000 profit in a 12-month accounting period in 2026/27. Sam has no other income and the company cannot claim the Employment Allowance.
With a £12,570 salary:
- Employer NI: (£12,570 − £5,000) × 15% = £1,135.50.
- Taxable profit: £60,000 − £12,570 − £1,135.50 = £46,294.50. That is under £50,000, so the rate is 19%.
- Corporation tax: £46,294.50 × 19% = £8,795.96.
- Profit left for dividends: £46,294.50 − £8,795.96 = £37,498.54.
- Dividend tax: the salary uses the Personal Allowance, the first £500 of dividends is taxed at 0%, and the rest is in the basic rate band: (£37,498.54 − £500) × 10.75% = £3,977.34. Sam's total income of £50,068.54 stays under £50,270.
- Sam keeps £12,570 + £37,498.54 − £3,977.34 = £46,091.20.
The same £60,000 with other salaries:
| £12,570 salary | £5,000 salary | No salary | £30,000 salary | |
|---|---|---|---|---|
| Employer NI | £1,135.50 | £0 | £0 | £3,750.00 |
| Taxable profit | £46,294.50 | £55,000.00 | £60,000.00 | £26,250.00 |
| Corporation tax | £8,795.96 | £10,825.00 | £12,150.00 | £4,987.50 |
| Dividends | £37,498.54 | £44,175.00 | £47,850.00 | £21,262.50 |
| Income tax and employee NI on salary | £0 | £0 | £0 | £4,880.40 |
| Dividend tax | £3,977.34 | £3,881.29 | £3,738.85 | £2,480.10 |
| Sam keeps | £46,091.20 | £45,293.71 | £44,111.15 | £43,902.00 |
How the other columns are worked out:
- £5,000 salary: the profit of £55,000 is in the marginal relief band: £55,000 × 25% − (£250,000 − £55,000) × 3/200 = £13,750 − £2,925 = £10,825. Of the dividends, £7,570 fall inside the Personal Allowance and £500 inside the dividend allowance; £36,105 × 10.75% = £3,881.29.
- No salary: £60,000 × 25% − £190,000 × 3/200 = £15,000 − £2,850 = £12,150. Dividends of £12,570 and £500 are taxed at 0%; £34,780 × 10.75% = £3,738.85. Sam also gets no qualifying year for the State Pension.
- £30,000 salary: income tax (£30,000 − £12,570) × 20% = £3,486 and employee NI £17,430 × 8% = £1,394.40. Salary plus dividends of £51,262.50 cross £50,270, so £992.50 of dividends are taxed at 35.75%: £19,770 × 10.75% + £992.50 × 35.75% = £2,125.28 + £354.82 = £2,480.10.
The £12,570 salary leaves Sam £797.49 more than a £5,000 salary, £1,980.05 more than no salary and £2,189.20 more than a £30,000 salary. Legal basis for marginal relief: Corporation Tax Act 2010 s. 18B, with the fraction of 3/200 set by Finance Act 2026 s. 12.
The result holds at other profit levels, with the same assumptions:
| Profit before the director's pay | £12,570 salary: you keep | £5,000 salary: you keep | Difference |
|---|---|---|---|
| £30,000 | £24,403.45 | £23,940.65 | £462.80 |
| £60,000 | £46,091.20 | £45,293.71 | £797.49 |
| £100,000 | £65,209.63 | £64,456.96 | £752.67 |
When a different salary makes sense
- You have a job or a pension elsewhere that already uses your Personal Allowance. Then the best salary is usually £5,000. Up to £5,000 there is no NI, only 20% income tax: £5,000 of profit paid as salary leaves you £4,000, while the same £5,000 paid as dividends leaves £3,614.63 after 19% corporation tax and 10.75% dividend tax (once your £500 allowance is used). Above £5,000, the 15% employer NI tips the balance to dividends.
- The company can claim the Employment Allowance. Then the £10,500 allowance covers the employer NI on the salary, and £12,570 costs the company nothing in NI. A company whose only director is its only employee paid above £5,000 cannot claim it.
- You live in Scotland. At £12,570 your salary is inside the Personal Allowance, so nothing changes. Above it, Scottish rates apply to salary in 2026/27: 19% from £12,571 to £16,537, 20% to £29,526, 21% to £43,662, 42% to £75,000, 45% to £125,140 and 48% above. Dividends are taxed at the same rates as in the rest of the UK.
- Your profit is higher than you need. Keep salary plus dividends at £50,270 or less where you can: above it, dividends are taxed at 35.75% instead of 10.75%. Profit you leave in the company has paid corporation tax only. Above £100,000 of income, your Personal Allowance falls by £1 for every £2.
How to pay yourself, step by step
- Register the company as an employer with HMRC before the first salary payment, and run payroll every month.
- Pay the salary through payroll, for example £1,047.50 a month for £12,570 a year. Tell the payroll that you are a director, so NI is worked out on annual earnings.
- Check the profits available before each dividend: the company must not pay out more than its profits from this and earlier years, after corporation tax.
- Declare the dividend at a directors' meeting and keep minutes, even if you are the only director.
- Write a dividend voucher for each payment, with the date, the company name, the shareholders' names and the amount. Each shareholder gets a copy and the company keeps one.
- Report the dividends. Over £10,000 of dividends in 2026/27 means a Self Assessment return by 31 January 2028; see our guide to Self Assessment for company directors.
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Frequently asked questions
What is the most tax-efficient director salary for 2026/27?
£12,570 for most directors who have no other income: it uses the Personal Allowance, costs no employee NI and saves more corporation tax than the employer NI it costs. If another job already uses your Personal Allowance, £5,000 is usually better.
Is it better to take salary or dividends in 2026/27?
Both. A salary up to £12,570, then dividends: above £12,570, £115 of profit leaves you £72 as salary but £83.14 as a basic rate dividend.
Did the dividend tax rise to 10.75% change the answer?
No. It narrows the gap, but above £12,570 a dividend still leaves you more than salary at the basic rate, because salary there costs 20% income tax, 8% employee NI and 15% employer NI.
Do I pay National Insurance on dividends?
No. Directors pay NI on salary and bonuses above £12,570 a year. Dividends are taxed only with dividend tax, at 10.75%, 35.75% or 39.35% above your allowances.
Do I need a tax return if I pay myself in dividends?
Yes, if your dividends are over £10,000 in the tax year. Up to £10,000, and above your allowances, you can tell HMRC instead and pay through your tax code. Dividends inside your Personal Allowance and the £500 dividend allowance need no report.