Salary vs dividends in 2026/27: what a director should take
The dividend rate rise in April 2026 (10.75% basic, 35.75% higher) narrowed the gap, but a small salary plus dividends is still the cheapest way to pay yourself from a limited company. Here is the logic, with numbers.
The three moving parts
- Salary is a company expense (saves 19–25% corporation tax) but attracts employer NI at 15% above £5,000 and, above £12,570, income tax at 20%+ and employee NI at 8%.
- Dividends are paid from profit after corporation tax, with no NI, then taxed at 10.75% / 35.75% / 39.35% above a £500 allowance.
- Pension contributions made by the company are deductible for corporation tax and carry no NI or income tax now — the most tax-efficient pound, at the price of not touching it until 55 (57 from 2028).
Why £12,570 is the usual answer
At £12,570 the salary uses the whole personal allowance (so no income tax), sits exactly at the employee NI primary threshold (so no employee NI), and stays above the £6,500 lower earnings limit that earns a qualifying year for the State Pension. The company pays £1,135.50 employer NI on the £7,570 above the £5,000 secondary threshold — but the salary and that NI are both deductible, so the net cost is modest. Single-director companies cannot claim the Employment Allowance, which is why the threshold matters.
When £5,000 beats £12,570
If profits are small (under about £20,000) the corporation tax saved on the extra £7,570 of salary is less than the employer NI it triggers, so a £5,000 salary — the point where employer NI starts — can leave slightly more in your pocket. It still counts as a qualifying year for the State Pension. The difference is usually under £100.
Worked example: £80,000 profit
| Salary | Corporation tax | Dividends | Personal tax + NI | Take-home |
|---|---|---|---|---|
| £0 | £17,450 | £62,550 | £8,389 | £54,161 |
| £5,000 | £16,125 | £58,875 | £8,863 | £55,012 |
| £12,570 | £13,818 | £52,476 | £9,282 | £55,765 |
| £30,000 | £8,788 | £37,463 | £13,152 | £54,311 |
| £50,270 | £4,359 | £18,581 | £17,020 | £51,831 |
Every pound of salary above £12,570 costs more than it saves. Try your own profit in the dividend tax calculator, or get the full twelve-salary table in our optimiser spreadsheet.
Don't forget
- Dividends can only be paid from retained profit after corporation tax — paying more than that is an illegal dividend.
- Keep board minutes and dividend vouchers for each payment.
- Above £100,000 of total income the personal allowance tapers away (60% effective rate to £125,140); a pension contribution is the standard fix.
- Scotland has different income tax bands for salary; dividend rates are UK-wide.
Rates and thresholds for 2026/27, checked against GOV.UK on 20 September 2026. England, Wales and Northern Ireland. Not tax advice.