Director's Salary vs Dividends 2026/27: The Optimal Split
By Sardar Muhammad, AAT • • 10 min read
💰 The Quick Answer for 2026/27
For most company directors, the optimal strategy is:
- Salary: £12,570 per year (£1,047.50 per month)
- Dividends: The rest, up to £50,270 total income (basic rate band)
- This minimises tax while maintaining state pension entitlement
Why Does This Matter?
As a limited company director, you control how you extract money from your business. The two main options are:
- Salary – taxed as employment income with National Insurance
- Dividends – taxed at lower rates, but paid from post-tax profits
Getting the mix right can save you thousands of pounds in tax each year.
2026/27 Tax Rates & Thresholds
Income Tax Rates
| Band | Income | Tax Rate |
|---|---|---|
| Personal Allowance | £0 - £12,570 | 0% |
| Basic Rate | £12,571 - £50,270 | 20% |
| Higher Rate | £50,271 - £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Dividend Tax Rates
| Band | Dividend Tax Rate |
|---|---|
| Dividend Allowance | £500 tax-free |
| Basic Rate Band | 8.75% |
| Higher Rate Band | 33.75% |
| Additional Rate Band | 39.35% |
National Insurance Rates
| Type | Rate | Threshold |
|---|---|---|
| Employee NI (Class 1) | 8% | On earnings £12,570 - £50,270 |
| Employee NI (above UEL) | 2% | On earnings over £50,270 |
| Employer NI | 15% | On earnings over £5,000 |
Key point: Dividends don't attract National Insurance, which is why they're more tax-efficient than salary for higher amounts.
The Optimal Strategy Explained
Option 1: Salary at £12,570 (Recommended for most)
Why £12,570?
- Uses your full personal allowance (tax-free)
- Above the Lower Earnings Limit (£6,396) – qualifies for state pension
- Below the Primary Threshold (£12,570) – no employee NI
- But above £5,000 so some employer NI applies (£1,136)
- Salary is a company expense, reducing corporation tax
Option 2: Salary at £9,100 (Alternative approach)
Why £9,100?
- Just above the Lower Earnings Limit for pension qualification
- Below the Secondary Threshold – no employer NI
- You don't fully use your personal allowance
- May be better if you have other income using your allowance
Worked Example: £50,000 Company Profit
Let's compare two scenarios for a director with £50,000 available to extract:
✅ Optimal: £12,570 Salary + Dividends
Salary: £12,570
Employee NI: £0 (below threshold)
Employer NI: £1,136 (on amount over £5,000)
Income Tax on salary: £0 (covered by personal allowance)
Corporation tax saved: £2,591 (19% of £13,706 salary + employer NI)
Remaining profit for dividends: £36,294
Corporation tax on profit: £6,896
Dividends available: £29,398
Dividend tax: £2,529 (8.75% on £29,398 - £500 allowance)
Total tax paid: £10,561 | Net received: £39,439
❌ All Salary: £50,000
Income Tax: £7,486 (20% on £37,430)
Employee NI: £2,994 (8% on £37,430)
Employer NI: £6,750 (15% on £45,000)
Total tax paid: £17,230 | Net received: £39,520
You save £6,669 using salary + dividends!
Important Considerations
1. State Pension Entitlement
To qualify for a year of state pension, you need earnings above the Lower Earnings Limit (£6,396). Both the £12,570 and £9,100 salary options qualify.
2. Employment Allowance
If you're the only employee (director) of your company, you cannot claim the Employment Allowance (£5,000 off employer NI). This applies to single-director companies without other employees.
3. Dividend Restrictions
You can only pay dividends from retained profits. You cannot pay dividends if your company doesn't have enough profit. Check your balance sheet before declaring dividends.
4. Personal Circumstances
The optimal strategy depends on your situation:
- Do you have other income (employment, rental, investments)?
- Are you receiving child benefit? (High Income Charge kicks in at £60,000)
- Do you want to maximise pension contributions?
- Are you planning to apply for a mortgage? (Lenders prefer salary)
Frequently Asked Questions
What is the optimal director's salary for 2026/27?
For most directors, £12,570 per year is optimal. This uses your full personal allowance, qualifies for state pension, avoids employee NI, and is tax-deductible for the company.
Should I pay myself a salary or dividends?
A combination is usually best. Take a small salary to use your personal allowance and maintain state pension entitlement, then take the rest as dividends at the lower dividend tax rates.
What are the dividend tax rates for 2026/27?
Dividend tax rates are: 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). The dividend allowance is £500 – you pay no tax on the first £500 of dividends.
Get Personalised Tax Advice
Every situation is different. I'll calculate the optimal salary and dividend mix for your specific circumstances.
Sardar Muhammad, AAT Certified
Sardar is an AAT certified accountant and founder of LimeTree Accounting Solutions in Glasgow. He specialises in helping small company directors with tax-efficient remuneration strategies.