A rise in dividend tax rates for the 2026/27 tax year and the continued freeze on personal allowances have narrowed the gap between remuneration through payroll and payouts of company profits. While a mix of salaries and dividends remains attractive, determining the best salary and dividend split for directors in 2026/27 requires a clear understanding of tax rules and the broader compliance environment.
The shifting tax landscape
The starting point for any remuneration decision is understanding the current tax thresholds for 2026/27, which form the basis of any salary and dividend strategy for UK company directors.
Key income tax thresholds:
- Personal Allowance: £12,570 (no income tax)
- Basic rate: 20% on income up to £37,700 above the allowance
- Higher rate: 40% up to £125,140
- Additional rate: 45% above £125,140
National Insurance thresholds:
- Lower Earnings Limit: £129 per week (£6,708 per year)
- Primary Threshold: £242 per week (£12,570 per year)
- Secondary Threshold: £96 per week (£5,000 per year)
Employer National Insurance becomes payable once salary exceeds the secondary threshold, which is significantly lower than the income tax threshold.
Dividend taxation:
- Dividend allowance: £500 (tax-free)
- Basic rate: 10.75%
- Higher rate: 35.75%
- Additional rate: 39.35%
Corporation tax rates:
- 19% for profits up to £50,000
- 25% for profits above £250,000
- Marginal relief applies between these limits
Beyond tax rates, two practical considerations shape how directors structure their income.
Employment Allowance
- Reduces employer National Insurance liability by up to £10,500
- Not available to single-director companies with no additional employees
- As a result, sole directors must account for employer NIC on salaries above £5,000
National Minimum Wage rules
- Generally do not apply to directors acting purely as office-holders
- Apply only where a director has a formal employment contract
- This allows flexibility in setting salary levels within tax-efficient limits
Salary: securing tax relief but triggering contributions
Salary paid through payroll reduces taxable profits and therefore lowers corporation tax. It also counts as “qualifying income” for the state pension if it exceeds the lower earnings limit. Directors pay National Insurance on annual earnings above the primary threshold; HMRC notes that contributions are calculated on the director’s total annual income. Employers, however, must pay contributions on salary above the secondary threshold, regardless of whether the employee is a director.
For 2026/27, there are two frequently discussed salary points:
Lower earnings limit (£6,708 per year)
Paying a salary just above this limit secures a qualifying year for the state pension and avoids employee National Insurance contributions because the threshold for contributions is £12,570. However, because the secondary threshold is only £5,000, the company pays employer National Insurance on the difference (£1,708) at 15%, costing roughly £256. Salaries at this level provide limited corporation tax relief because the salary is small.
Personal allowance (£12,570 per year)
A salary equal to the personal allowance remains free of income tax, which maximises corporate tax relief. For sole‑director companies, the salary exceeds the £5,000 secondary threshold, so employer National Insurance of 15% applies to £7,570, an approximate cost of £1,135. Nevertheless, an additional £5,862 of salary (the difference between £12,570 and £6,708) at the 19% small‑profits rate saves about £1,114 in corporation tax, offsetting much of the employer NIC bill. Companies that qualify for the Employment Allowance will have the first £10,500 of employer NIC covered, so a salary at the personal‑allowance level can be paid free of income tax and National Insurance.
Because directors’ National Insurance is calculated annually, it is straightforward to make a single year-end adjustment if multiple payrolls have been run during the year. Importantly, there is no legal obligation to pay the national minimum wage to directors without employment contracts, so setting a salary at a low level is lawful when there is no contract of employment.
Dividends: attractive but subject to restrictions
Dividends can only be paid from profits after corporation tax. They can’t be deducted for corporation tax, and if profits are low, they’re treated as a loan. HMRC’s director‑information hub points out that dividends must be formally declared and recorded and can be paid at any time, but only from retained profits. Unlike salary, dividends are not subject to National Insurance. However, the tax-free dividend allowance is now just £500, and the rate for basic-rate taxpayers has increased to 10.75% from April 2026. The higher‑rate dividend tax is 35.75%, which erodes much of the advantage relative to salary once income exceeds £50,270.
Because dividends fall on top of salary, directors must consider the combined income when estimating their tax band. Taking large dividends without sufficient profits may also breach company law: directors risk personal liability if they knowingly authorise unlawful distributions. Dividends cannot be used to avoid National Insurance, which is, in reality, employment income, and HMRC has wide powers to reclassify disguised remuneration as salary.
Constructing the best salary and dividend split for directors 2026/27
A balanced approach typically involves a mix of salary and dividends, although the optimal split varies depending on profits and individual circumstances. Key considerations include the following:
- Assess profit levels. Dividends are only possible if the company has retained profits. Start by estimating expected profits after salary and overheads to identify the amount available for distribution.
- Choose a salary level. For sole-director companies, paying a salary equal to the personal allowance (£12,570) supports effective tax planning for directors’ salaries and dividends UK by maximising corporation-tax relief and ensuring state-pension credit; employer NIC costs are partially offset by corporation-tax savings.
If cash flow is tight or profits are small, a salary just above the lower earnings limit (£6,708) avoids income tax and employee NIC but still triggers employer NIC and yields less corporation tax relief.
- Manage employer National Insurance. Companies with more than one employee can claim the Employment Allowance and offset up to £10,500 of employer NIC. If eligible, the allowance makes a salary of £12,570 more attractive because both employee and employer NIC may be nil.
- Stay within the basic rate band. Where possible, keep total income (salary plus dividends) under £50,270 to avoid the 35.75% dividend tax rate. If income exceeds this band, consider timing dividends over multiple tax years or using pension contributions to reduce taxable income.
- Document dividends properly. Prepare board minutes and dividend vouchers. Ensure dividends are not disguised loans or payments for services. Misclassification can trigger HMRC enquiries and penalties.
- Consider other allowances. Company pension contributions are tax-deductible and not considered employment income, making them a beneficial part of the pay mix. Similarly, you can provide legitimate benefits like mobile phones or health checks, incurring only modest Class 1A NIC costs.
While many directors still favour a salary of £12,570 and dividends up to the basic rate threshold, a tailored salary and dividend strategy for UK company directors is essential because every company’s circumstances differ. Profit levels, cash requirements, eligibility for the Employment Allowance, and personal tax situations (such as the high‑income child benefit charge or tapered pension annual allowance) should all be considered. HMRC’s consultation on reporting payments to participators indicates greater scrutiny on how owner‑managed companies extract profits, so documentation and compliance are increasingly important.
How Apex Accountants & Tax Advisors can assist
Navigating the interplay between salary, dividends and corporation tax requires careful tax planning for directors salary and dividends UK. Apex Accountants & Tax Advisors can:
- run payrolls and advise on the most tax‑efficient salary level for your company;
- calculate corporation‑tax savings versus National Insurance costs based on your profit projections;
- ensure dividends are legal by reviewing retained earnings and preparing board minutes;
- assess eligibility for the Employment Allowance and other reliefs;
- integrate pension contributions and other benefits into your remuneration package;
- monitor legislative changes, including consultations on participant payments.
By tailoring our advice to your circumstances, we help you maximise your takeout earnings while staying within the rules. Contact Apex Accountants today for a confidential discussion or book a free consultation to review your 2026/27 remuneration strategy.
Frequently asked questions
What is the dividend allowance in 2026/27?
The dividend allowance, which is taxed at 0%, is £500 for the 2026/27 tax year. You can receive dividends up to this amount, in addition to your personal allowance, without paying dividend tax. Any dividend income above this threshold is taxed at 10.75% in the basic rate band and 35.75% in the higher‑rate band.
Do directors have to pay National Insurance on dividends?
No. Dividends are distributions of post‑tax profits and are not subject to National Insurance. However, dividends can only be paid from retained profits and are taxed separately as income.
What is the minimum salary I need to qualify for the state pension?
To accrue a qualifying year for state pension purposes, your salary must exceed the lower earnings limit, which is £6,708 per year in 2026/27. Paying yourself at or above this level secures your National Insurance record, even though you do not pay employee NIC until your salary exceeds £12,570.
Can my company pay dividends if it makes a loss?
No. HMRC’s guidance states that dividends can only be paid from retained company profits and must be formally declared. Taking dividends when there are no profits is illegal and is treated as a loan.
What is the Employment Allowance and can my company claim it?
The Employment Allowance allows eligible employers to reduce their annual employer National Insurance liability by up to £10,500. To qualify, your business must have at least two employees or directors and must not be caught by the single‑director exclusion or other restrictions. Sole‑director companies with no other staff cannot claim the allowance.
Is there a ‘best’ salary and dividend split for every director?
There is no one‑size‑fits‑all answer. A salary equal to the personal allowance (£12,570) with dividends up to the basic rate limit (£50,270 total income) is often efficient because there is no Income tax on salaries and dividends is lower than income tax. However, the optimal mix depends on your profits, eligibility for the employment allowance, your personal tax situation, and your cash flow needs. Professional advice ensures that you remain compliant and make the most of available allowances.
