Most owner-directors pay themselves with a mix of two things: a salary through payroll, and dividends from the company's profits. They are taxed completely differently, and getting the balance right routinely saves a director several thousand pounds a year. The standard answer has been the same for a while. What has changed in 2026/27 is the cost of getting it wrong.
Why a mix, rather than just one or the other
A salary is a business expense. It reduces the company's profit and therefore its corporation tax bill. But once salary passes certain thresholds it attracts National Insurance, both for you and for the company, and above the personal allowance it attracts income tax.
A dividend is a share of profit paid after corporation tax. It attracts no National Insurance at all, and dividend tax rates are lower than income tax rates. But it does not reduce the company's corporation tax, and you can only pay one out of profits the company has actually made.
So the game is: take enough salary to use up your tax-free allowances and the corporation tax relief, but not so much that National Insurance starts to bite. Then take the rest as dividends.
The standard answer for 2026/27
Why that exact figure? Because several thresholds line up on it:
- It is the personal allowance, so you pay no income tax on it.
- It is the employee National Insurance threshold, so you pay no employee NI on it either.
- It is above the lower earnings limit of £6,708, so the year counts towards your State Pension even though you paid no NI. Yes, really.
- The whole amount is deductible against corporation tax, saving the company 19 to 25 per cent of it.
The one cost is employer's National Insurance, charged at 15 per cent on salary above £5,000. On £12,570 that is £1,135.50 for the year. That is also deductible, and the corporation tax saved on the salary plus the NI comfortably outweighs it. The working, at the lowest 19 per cent rate:
- Deductible cost to the company: £12,570 salary + £1,135.50 employer NI = £13,705.50
- Corporation tax saved: £13,705.50 × 19% = £2,604.05
- Less the employer NI actually paid: £2,604.05 − £1,135.50 = £1,468.55 net saving
At the 25 per cent main rate the relief rises to £3,426.38, so the case for the salary gets stronger, not weaker, as the company grows. And that is before we have even looked at dividends.
Then the dividends
With a £12,570 salary using your personal allowance, you can take up to £37,700 in dividends before you reach the higher rate threshold of £50,270. The first £500 is tax-free under the dividend allowance; the rest is taxed at the basic dividend rate.
Here is the part that changed. From 6 April 2026 the basic dividend rate rose from 8.75 to 10.75 per cent, and the higher rate from 33.75 to 35.75 per cent. On the full £37,700 of basic-rate dividends:
- Taxable dividends: £37,700 − £500 allowance = £37,200
- This year: £37,200 × 10.75% = £3,999
- Last year: £37,200 × 8.75% = £3,255
- Extra cost of the rate rise: £3,999 − £3,255 = £744
Unavoidable, but it makes it more important than ever that the salary figure underneath is right.
Worked example, single director, no other income, drawing £50,270 in total:
- Salary £12,570: income tax £0, employee NI £0, employer NI £1,135.50 (paid by the company)
- Dividends £37,700: dividend tax about £3,999
- Cash in your pocket: about £46,270 on £50,270 drawn
Compare that with taking the whole £50,270 as salary:
- Income tax: (£50,270 − £12,570) × 20% = £7,540
- Employee NI: (£50,270 − £12,570) × 8% = £3,016
- Employer NI, paid by the company: (£50,270 − £5,000) × 15% = £6,790.50
- Cash in your pocket: £50,270 − £7,540 − £3,016 = £39,714, against £46,270 under the salary-and-dividends route
- National Insurance alone: £9,806.50 versus £1,135.50, so £8,671 more NI for the same gross pay
The all-salary route does save corporation tax, because the whole amount is deductible, so the fairest comparison is on the same company profit rather than the same gross pay. On £60,000 of profit, salary-and-dividends puts about £46,091 in your pocket against £41,197 for all-salary: a difference of roughly £4,895 a year. You can run your own figure, with every line of the working, in our director take-home calculator.
The alternatives, and why they usually lose
Salary of £5,000. Sits under the employer NI threshold so the company pays no NI at all. But you lose the corporation tax relief on the other £7,570, and £5,000 is below the lower earnings limit, so the year does not count towards your State Pension. Rarely worth it.
Salary of £6,708. The lower earnings limit exactly. You get the pension year for (£6,708 − £5,000) × 15% = £256.20 of employer NI, but you forgo corporation tax relief on the £5,862 difference up to £12,570, worth at least £5,862 × 19% = £1,113.78. The maths almost always favours the full £12,570.
Dividends only, no salary. No NI, no payroll admin, but no pension year, no corporation tax relief, and you are wasting a £12,570 personal allowance. The worst of the common options.
When the standard answer is wrong
This is where an article stops and advice starts, because the £12,570 answer assumes a fairly specific situation. It comes unstuck when:
- You have other income. A part-time job, a pension, rental income. If something else is already using your personal allowance, a £12,570 salary is now taxable and the arithmetic shifts.
- Your company qualifies for the Employment Allowance. This wipes out up to £10,500 of employer NI, but a single-director company with no other employees cannot claim it. A two-director company can, and once employer NI disappears, a higher salary becomes much more attractive, particularly if the company pays corporation tax at the 25 per cent main rate where the relief is worth more. For some two-director companies, more salary and fewer dividends is now the better answer.
- The company has low or no profit. Dividends can only be paid from distributable profit. If the profit is not there, dividends are unlawful, and the £12,570 salary might be all you can properly take.
- You want to put money into a pension. Employer pension contributions are a third route out of the company, often more efficient than either salary or dividends, and they do not affect the salary decision so much as sit beside it.
- You have children and your income is heading past £60,000. The High Income Child Benefit Charge starts to claw back child benefit above that level. The timing and mix of dividends can keep you under it.
- You have a student loan. Dividends count towards student loan repayments once they exceed £2,000 in a year, which surprises many directors in January.
The paperwork nobody enjoys
A dividend is only a dividend if it is declared properly: a board minute approving it, a dividend voucher for each shareholder, and enough distributable profit at the time it was paid. Money simply drawn out of the company account without those is a director's loan, which carries its own tax charges. If you are paying yourself monthly, the tidy approach is to run the £1,047.50 salary through payroll and declare dividends quarterly, with the paperwork done each time.
The honest summary
For most single-director companies in 2026/27, pay yourself £12,570 through payroll and take the rest as dividends, keeping total income under £50,270 where you can. Accept that the dividend tax bill is a bit higher this year. But if you have other income, a second director, thin profits, or children and a rising income, the standard answer needs checking against your actual numbers, and that check typically pays for itself many times over.
We run this calculation for every limited company client at the start of each tax year, and again whenever the Budget moves the goalposts. It is included in every SJE Capital plan.
Sources: HMRC guidance on GOV.UK for income tax rates, National Insurance thresholds and tax on dividends. See our 2026/27 tax rates page for the full figures. Correct for the 2026/27 tax year and reviewed September 2026. General guidance, not advice on your specific circumstances.
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