20 August 2026
Salary vs dividends: the most tax-efficient way to pay yourself as a director
How limited company directors typically combine a small salary with dividends to minimise tax in 2026/27, including Corporation Tax, Employer National Insurance, and the Employment Allowance.
If you run your own limited company, you usually get to choose how you're paid: salary, dividends, or a mix of both. That choice matters, because salary and dividends are taxed under completely different rules, and getting the split right can be worth thousands of pounds a year compared to taking everything one way.
This isn't personal advice, your own circumstances (other income, other directors, whether your company has staff) can change the right answer, so it's worth running your specific numbers past an accountant. But the underlying mechanics are the same for most single-director companies, and they're worth understanding before that conversation.
Why salary and dividends are taxed so differently
Salary is a business expense. It's deducted from your company's profit before Corporation Tax is worked out, but it's charged to Income Tax and National Insurance on the way out, both the employee's National Insurance and the company's own employer National Insurance.
Dividends work the other way round. They're paid out of profit that's already had Corporation Tax deducted, so there's no further deduction for the company. For the director receiving them, dividends are never subject to National Insurance at all, employee or employer, just dividend tax above the dividend allowance.
Corporation Tax sets the starting point
Since however much salary you take reduces the profit Corporation Tax is charged on, it's worth knowing where your company sits:
- Small profits rate: 19% on profit up to £50,000
- Main rate: 25% on profit above £250,000
- Marginal relief: a sliding scale between those two thresholds, working out at an effective marginal rate of 26.5% on profit within that band
These thresholds are divided by the number of associated companies you have, so if you own more than one company, the actual thresholds that apply to each are lower.
The two salary levels most directors consider
There isn't one universally correct salary. Most guidance for 2026/27 centres on two figures, and which one suits you depends on a single factor: whether your company can claim the Employment Allowance.
- £6,708, the Lower Earnings Limit: below your £12,570 Personal Allowance, so no Income Tax, and below the £12,570 Primary Threshold, so no employee National Insurance either. It's also enough to count as a qualifying year towards your State Pension. The catch is that £6,708 sits above the £5,000 employer National Insurance secondary threshold, so if your company can't claim the Employment Allowance, this salary does trigger a small amount of employer National Insurance.
- £12,570, the full Personal Allowance: still no Income Tax and no employee National Insurance, since both thresholds match. If your company can claim the Employment Allowance, the employer National Insurance on the extra salary between £6,708 and £12,570 is absorbed by the allowance, so you can extract more as a Corporation-Tax-deductible salary at no extra National Insurance cost.
The Employment Allowance is the deciding factor
The Employment Allowance can reduce a company's employer National Insurance bill by up to £10,500 a year for 2026/27. The restriction that catches most contractors and small business owners: a company generally can't claim it if the director is the only person paid above the secondary threshold. If you employ at least one other member of staff earning above £5,000 a year, you likely qualify. If you're the sole director with no other staff, you likely don't, in which case a salary right at £5,000 (avoiding employer National Insurance entirely, but missing the State Pension qualifying year) or £6,708 (accepting a small employer National Insurance cost to secure that qualifying year) are the two figures worth comparing.
A worked example
Say your company has £60,000 of profit available for the year, before any director's salary is deducted, and you're a sole director without other staff, so the Employment Allowance isn't available. Compare taking a £6,708 salary plus dividends against taking dividends only.
With a £6,708 salary: employer National Insurance on the £1,708 above the secondary threshold comes to £256.20, so £6,964.20 is deducted from profit before Corporation Tax. That leaves £53,035.80 of profit, taxed at an effective 19.43% under marginal relief, a Corporation Tax bill of £10,304.49. The remaining £42,731.31 is paid out as dividends. Your remaining Personal Allowance (£5,862, since the salary used £6,708 of it) plus the £500 dividend allowance shelters £6,362 of that tax-free; the rest, £36,369.31, falls in the basic rate band and is taxed at 10.75%, £3,909.70. You take home £45,529.61 in total.
With dividends only: the full £60,000 is taxed at Corporation Tax first, an effective 20.25% under marginal relief, £12,150, leaving £47,850 to pay out as dividends. Your full £12,570 Personal Allowance plus the £500 dividend allowance shelters £13,070 tax-free; the remaining £34,780 is taxed at 10.75%, £3,738.85. You take home £44,111.15 in total.
The small salary comes out £1,418.46 ahead, even after paying employer National Insurance on it, because the Corporation Tax saved by deducting it from profit outweighs that cost, and you get a State Pension qualifying year included. This is a simplified single-company example; associated companies, other income, or a company that does qualify for the Employment Allowance would change the numbers.
One more route worth knowing about: employer pension contributions are also deducted from profit before Corporation Tax, and unlike salary, they're not subject to any National Insurance at all, employee or employer. For directors who don't need to draw out every pound of profit immediately, pension contributions are often the most tax-efficient use of surplus profit, worth discussing alongside your salary and dividend split.
None of our calculators currently model the combined salary, dividend, and Corporation Tax picture for a limited company in one place. Our Dividend Tax Calculator, Salary Calculator, and Income Tax Calculator can each check one piece of the puzzle individually.