Everything limited company directors need to know about taking income tax-efficiently through salary and dividends in the 2026/27 tax year

One of the most common questions asked by limited company directors is whether they should pay themselves through a salary, dividends or a combination of the two.

For many owner-managed companies, the most appropriate approach is not to choose one or the other. It is often to take a carefully calculated salary and then use dividends for additional income, provided the company has sufficient distributable profits.

However, there is no single salary-and-dividend combination that is right for every director.

The best approach in the 2026/27 tax year depends on factors including:

• The company’s profit
• Whether it has other employees
• Whether Employment Allowance is available
• The director’s other income
• The amount the director needs personally
• Pension contributions
• Student loan repayments
• Child Benefit
• The director’s age
• Whether the company has sufficient cash
• Whether enough distributable profit is available

The correct decision should therefore be based on the director’s complete financial position rather than a standard figure copied from an online calculator.

The short answer

For many limited company directors, a combination of salary and dividends remains a practical way to take income in 2026/27.

Salary can use some or all of the director’s Personal Allowance and may qualify as a deductible company expense. Dividends do not attract National Insurance, but they can only be paid from available company profits after Corporation Tax.

Dividend tax rates have increased for basic-rate and higher-rate taxpayers in 2026/27, making individual calculations and regular reviews more important.

What are the main ways to take money from a limited company?

A director cannot simply treat the company bank account as personal money.

A limited company is legally separate from its directors and shareholders. Any money taken from the business needs to be recorded correctly.

Common ways to take money include:

• Salary
• Dividends
• Reimbursement of genuine business expenses
• Repayment of money owed to the director
• Employer pension contributions
• Benefits in kind
• A director’s loan

Each route has different tax, National Insurance, legal and accounting consequences.

This article focuses on salary and dividends, but the wider remuneration package should also be considered.

How does a director’s salary work?

A salary is payment made to a director through the company’s payroll.

The company will normally need to:

• Register as an employer where required
• Operate PAYE
• Submit payroll information to HMRC
• Produce payslips
• Deduct Income Tax where applicable
• Deduct employee National Insurance where applicable
• Pay employer National Insurance where applicable

Salary is generally treated as a business expense when calculating the company’s taxable profit, provided it is incurred wholly and exclusively for the purposes of the business.

This means salary can reduce the amount of profit subject to Corporation Tax.

However, salary may create employee and employer National Insurance liabilities, depending on the amount paid and the circumstances.

What are the 2026/27 Income Tax thresholds?

For most taxpayers in England, Wales and Northern Ireland, the standard Personal Allowance for 2026/27 is £12,570.

The main Income Tax bands are:

• Personal Allowance: up to £12,570
• Basic rate: 20%
• Higher rate: 40%
• Additional rate: 45%

The Personal Allowance is gradually withdrawn where adjusted net income exceeds £100,000. It is fully lost when income reaches £125,140.

Scottish taxpayers have different Income Tax bands and rates for salary and other non-savings, non-dividend income. Dividend tax rates apply across the UK, but the interaction with a Scottish taxpayer’s wider income still needs to be considered carefully.

How does National Insurance affect salary?

Salary can create two types of National Insurance:

• Employee National Insurance, deducted from the director’s pay
• Employer National Insurance, paid by the company

For 2026/27, most employees pay employee National Insurance at 8% on earnings within the main band and 2% above the upper threshold.

Employers generally pay National Insurance at 15% on earnings above the employer threshold.

This means increasing salary can create an additional cost for both the director and the company.

However, employer National Insurance is generally deductible when calculating company profit for Corporation Tax purposes. The tax saving does not remove the full cost, but it should be included in the comparison.

Why do some directors take a salary below the Personal Allowance?

Some directors choose a salary that is below the £12,570 Personal Allowance.

This may be because:

• The company cannot claim Employment Allowance
• Employer National Insurance would otherwise be payable
• The director has income from another employment
• The director receives pension or rental income
• The director wants to avoid unnecessary payroll deductions
• The company’s cashflow is limited

A lower salary can reduce employer National Insurance, but it may also reduce the Corporation Tax deduction available to the company.

The most efficient salary therefore depends on the combined company and personal tax effect.

Why might a salary of £12,570 be considered?

A salary around the Personal Allowance may be considered where the director has no other taxable income using that allowance.

Potential advantages include:

• Using the available Personal Allowance
• Creating a larger company tax deduction
• Providing regular income through payroll
• Supporting a qualifying year for State Pension purposes where the relevant conditions are met
• Producing formal earnings records for mortgage or lending applications

However, employer National Insurance may be payable on part of the salary.

Whether the Corporation Tax saving outweighs the employer National Insurance cost depends on the company’s Corporation Tax position, Employment Allowance entitlement and other circumstances.

It should not be assumed that £12,570 is automatically the best salary for every director.

What is Employment Allowance?

Employment Allowance can reduce an eligible employer’s annual employer National Insurance bill.

However, not every company can claim it.

A company where the only employee above the employer National Insurance threshold is also a director may not qualify.

A company with additional employees may be eligible, subject to the full conditions.

This distinction can significantly affect the optimal salary calculation.

For example, a company able to offset employer National Insurance using Employment Allowance may find that a salary up to the Personal Allowance is more attractive than it would be for a single-director company that cannot claim the allowance.

Eligibility should be checked rather than assumed.

How do dividends work?

Dividends are payments made to shareholders from company profits.

They are not wages and should not be processed through payroll.

A company can only pay dividends where it has sufficient distributable profits. This broadly means accumulated realised profits after losses, Corporation Tax and previous distributions have been considered.

Before paying a dividend, the company should normally:

• Confirm sufficient distributable reserves are available
• Approve the dividend correctly
• Prepare appropriate company records
• Produce dividend vouchers
• Record the payment in the accounts

A bank balance alone does not prove that a dividend can legally be paid.

The company might have cash in the bank but insufficient retained profit. Equally, it may have sufficient accounting profit but not enough cash to make the payment safely.

What are the dividend tax rates for 2026/27?

The dividend allowance remains £500 for the 2026/27 tax year.

Dividend income above the available allowance is taxed according to the individual’s tax band.

For 2026/27, the dividend tax rates are:

• Basic-rate dividend tax: 10.75%
• Higher-rate dividend tax: 35.75%
• Additional-rate dividend tax: 39.35%

The basic and higher dividend rates are two percentage points higher than in the previous tax year.

This does not mean dividends are no longer useful. It means that directors should review the overall extraction strategy rather than relying on calculations from previous years.

Why do dividends not reduce Corporation Tax?

Dividends are paid from profits after Corporation Tax.

Unlike salary and employer pension contributions, dividends are not normally deducted when calculating the company’s taxable profit.

The company first calculates its taxable profits and Corporation Tax liability. Dividends can then be paid from the remaining distributable profits, provided the legal requirements are met.

This creates two layers of tax:

1. Corporation Tax on the company’s profit
2. Dividend tax when the shareholder receives taxable dividends

Any salary-versus-dividend comparison should consider both layers rather than looking only at the personal tax rate.

What Corporation Tax rate applies?

The Corporation Tax rate depends on the company’s level of taxable profit and its circumstances.

Broadly:

• Companies with profits up to the lower profit limit may qualify for the small profits rate
• Companies with profits above the upper profit limit generally pay the main rate
• Companies between the limits may receive marginal relief

The thresholds can be reduced where there are associated companies or where the accounting period is shorter than 12 months.

This means two directors taking the same salary and dividend may have different overall results because their companies pay Corporation Tax at different effective rates.

Salary versus dividends: the key differences

Salary

Salary:

• Is processed through payroll
• May attract Income Tax
• May attract employee National Insurance
• May attract employer National Insurance
• Is generally deductible for Corporation Tax
• Can be paid even if the company does not have distributable reserves, although affordability and directors’ duties still matter
• Can contribute towards qualifying earnings records where conditions are met

Dividends

Dividends:

• Are paid to shareholders
• Are not processed as salary
• Do not attract employee or employer National Insurance
• Are not deductible for Corporation Tax
• Can only be paid from sufficient distributable profits
• Must be properly approved and documented
• Are taxed at dividend tax rates above available allowances

Neither option should be judged in isolation.

A practical example

Consider a director who owns all the shares in a profitable limited company and has no other income.

The company wants to provide the director with personal income during 2026/27.

One approach could be:

• A salary using part or all of the available Personal Allowance
• Additional income through properly declared dividends

The salary may reduce the company’s taxable profit but could create employer National Insurance.

The dividends would not attract National Insurance, but they would come from after-tax profits and may be subject to dividend tax.

The correct comparison would need to consider:

• Corporation Tax saved by paying salary
• Employer National Insurance
• Employee National Insurance
• Income Tax
• Dividend tax
• Employment Allowance
• Available company profit
• Cashflow
• Other personal income

Without calculating all of these together, it is not possible to identify the most efficient result accurately.

What if the director has another job?

Where a director also receives employment income from elsewhere, the Personal Allowance and basic-rate tax band may already be partly or fully used.

A salary from the company could therefore attract Income Tax immediately.

Additional dividends may also fall into the higher or additional-rate bands sooner than expected.

The director’s PAYE tax code, National Insurance position and total income should all be reviewed.

A standard salary recommendation intended for a director with no other income may be unsuitable for someone with a separate job.

What if the director receives rental or pension income?

Rental income, pension income and certain other taxable income can also use the Personal Allowance and tax bands.

Although different types of income can be taxed under different rules, they interact when determining the individual’s overall tax position.

A director with significant rental or pension income may benefit from a different company remuneration strategy from a director whose only income comes from the company.

What if there are two directors?

Companies with two or more directors need to consider each director separately.

They may have different:

• Shareholdings
• Personal Allowances
• Other income
• Tax bands
• Student loan positions
• Pension objectives
• Cash requirements

Dividends are normally paid according to the rights attached to the shares.

A company cannot simply give one shareholder a different dividend from another shareholder holding the same class of shares unless the legal and constitutional position supports it.

Salary can differ because it is payment for work, but it should be commercially justifiable and correctly processed.

What if the director’s spouse or civil partner is a shareholder?

A spouse or civil partner may receive dividends if they genuinely own shares carrying the relevant rights.

However, share ownership should reflect the legal and commercial reality.

Transferring or issuing shares solely to alter the tax position can have legal and tax implications. The share class, voting rights, capital rights and entitlement to dividends all matter.

Professional advice should be obtained before changing the ownership structure.

How do dividends affect Child Benefit?

Dividend income counts towards adjusted net income.

Where an individual or their partner receives Child Benefit, higher income can create a High Income Child Benefit Charge.

This means a dividend that appears attractive when viewed only through dividend tax may create an additional Child Benefit repayment.

Directors with children should therefore consider adjusted net income, not just the headline dividend tax rate.

What happens when income exceeds £100,000?

The standard Personal Allowance is reduced by £1 for every £2 of adjusted net income above £100,000.

This creates a high effective marginal tax rate across the withdrawal range.

Salary, dividends, rental income and other taxable income can all contribute to adjusted net income.

Directors approaching this level should consider their extraction strategy alongside pension contributions, charitable giving and other legitimate planning opportunities.

This is an area where planning before the tax year ends is particularly valuable.

How do student loans affect the calculation?

Salary and dividend income can affect student loan repayments.

The detailed treatment depends on the repayment plan and how the income is reported.

A director might calculate an apparently efficient dividend amount but then face additional student loan repayments through Self Assessment.

Student loan obligations should therefore be included when estimating the director’s total personal liability.

Could pension contributions be better than salary or dividends?

Employer pension contributions can be an efficient way for a company to provide value to a director without paying the amount immediately as personal cash.

Where the relevant conditions are met, company pension contributions may:

• Be deductible for Corporation Tax
• Avoid employee National Insurance
• Avoid employer National Insurance
• Avoid immediate Income Tax for the director

However, the money is paid into a pension rather than made available for current spending.

Pension annual allowance rules, carry forward, existing contributions and the director’s retirement objectives must also be considered.

The correct question is often not simply “salary or dividends?” It may be “what combination of salary, dividends, pension and benefits best meets the director’s goals?”

Can the company pay dividends every month?

A company can pay dividends more than once during the year, provided sufficient distributable profits exist each time and the payments are properly approved.

Monthly payments should not simply be treated as dividends automatically.

The company should review current financial information before declaring each dividend.

Where fixed monthly transfers are made without checking available profit, there is a risk that the payments may become:

• Unlawful dividends
• Director’s loan account entries
• Amounts requiring repayment

Regular management accounts can make dividend planning much safer.

What happens if a dividend is paid without enough profit?

A dividend paid without sufficient distributable reserves may be unlawful.

If the shareholder knew or should reasonably have known that the company lacked sufficient profits, repayment may be required.

The payment could instead be recorded through the director’s loan account, potentially creating further tax and company law consequences.

This is why dividends should not be used as a year-end bookkeeping adjustment to explain unplanned personal withdrawals.

Why cashflow matters

Even where the company has enough retained profit to pay a dividend, it still needs enough cash.

Before taking money, directors should consider upcoming commitments including:

• Corporation Tax
• VAT
• PAYE and National Insurance
• Payroll
• Supplier payments
• Loan repayments
• Insurance
• Planned investment
• Seasonal reductions in income

A legal dividend can still be a poor commercial decision if it leaves the business unable to meet future obligations.

Common salary and dividend mistakes

Copying last year’s salary

Tax rates and thresholds change. A salary that was appropriate previously may no longer be the best option.

Taking monthly dividends without checking profit

Dividends require sufficient distributable reserves at the date they are declared.

Treating the bank balance as available profit

Cash and distributable profit are not the same.

Forgetting employer National Insurance

A salary below the Personal Allowance can still create an employer National Insurance cost.

Ignoring other personal income

Employment, rent, pensions and investment income can change the director’s tax bands.

Missing dividend paperwork

Dividends should be supported by proper approval records and dividend vouchers.

Taking more than the company can afford

The extraction strategy should protect company working capital and future tax payments.

Leaving planning until the year-end

Once the tax year has ended, some planning opportunities may no longer be available.

How often should the strategy be reviewed?

Director remuneration should ideally be reviewed:

• Before the start of the tax year
• When tax rates or thresholds change
• When company profit changes significantly
• Before declaring substantial dividends
• When the director’s personal income changes
• Before making major pension contributions
• Before the end of the tax year
• When taking on additional employees
• When the company becomes eligible or ineligible for Employment Allowance

A calculation prepared once and ignored for the rest of the year can quickly become outdated.

What information does an accountant need?

To calculate an appropriate salary-and-dividend strategy, an accountant may need:

• Forecast company profit
• Current retained earnings
• Latest management accounts
• Expected personal drawings
• Other employment income
• Rental income
• Pension income
• Savings and investment income
• Student loan information
• Child Benefit position
• Pension contribution history
• Details of associated companies
• Employment Allowance eligibility
• The company’s cashflow forecast

The more accurate the information, the more useful the recommendation will be.

Frequently asked questions

Are dividends still better than salary in 2026/27?

Dividends can still form part of an efficient remuneration strategy because they do not attract National Insurance. However, dividend tax rates have increased, dividends do not reduce Corporation Tax and sufficient distributable profits are required. The answer depends on the full calculation.

What is the best director’s salary for 2026/27?

There is no universal best salary. Common options may be based around National Insurance and Personal Allowance thresholds, but the result depends on Employment Allowance, other income, Corporation Tax and personal circumstances.

Can I take only dividends and no salary?

It may be legally possible where sufficient profits exist, but it may not be the most efficient or practical approach. A salary can provide a Corporation Tax deduction and may support National Insurance contribution records.

Can I take dividends if the company made a loss this year?

Possibly, if sufficient distributable profits have been retained from previous years. The current-year result alone does not determine dividend capacity, but the company’s accumulated reserves must be checked.

Do dividends count as earnings for pension purposes?

Dividends are generally not treated as relevant UK earnings for personal pension contribution limits in the same way as salary. Employer pension contributions operate differently.

Do dividends attract National Insurance?

Dividends do not normally attract employee or employer National Insurance.

Can salary and dividends be changed during the year?

Yes, but payroll changes need to be processed correctly and dividends require sufficient profits and proper documentation each time.

Do Scottish directors pay different dividend tax rates?

Dividend tax rates are UK-wide. However, Scottish Income Tax rates apply to salary and certain other non-dividend income, which can affect the wider calculation.

Final thoughts

Salary and dividends remain two of the main ways limited company directors take income, but there is no standard figure that works for everyone.

For 2026/27, directors need to consider increased dividend tax rates, employer National Insurance, Corporation Tax, available company profits and their full personal income position.

The most appropriate approach may involve:

• A carefully calculated salary
• Properly declared dividends
• Employer pension contributions
• Reimbursement of genuine business expenses
• Repayment of money owed to the director
• Regular reviews during the year

The aim should not simply be to pay the lowest possible tax. The strategy should also preserve company cashflow, comply with company law and provide the director with the right level of personal income.

Merranti Accounting can help limited company directors calculate an appropriate 2026/27 remuneration strategy, review available dividend reserves and plan withdrawals before avoidable tax or cashflow problems arise.

Written by Steve Watts