Salary and Dividends for Limited Company Directors: 2026/27 Guide

Whether you are new to contracting or feel like you have been in the market forever, it’s always good to make sure that you have the most tax efficient set-up for your company.

To do that you need to understand salary and dividends and what the tax implications are of both forms of remuneration. This then enables you to take home as much of your hard-earned money as possible.

Some of the most common questions we get asked are:

• What is the most tax efficient way to pay myself?
• Should I pay myself through solely a salary?
• Should I pay myself through a combination of salary and dividends?
• How often should I withdraw dividends?

In this guide we explain how both are taxed, what the key thresholds are for 2026/27, and how to structure your remuneration in a tax-efficient way.

If you have any questions, please get in touch with us.

Why have a combination of salary and dividends?

If you take all your income as salary, you will pay Income Tax and National Insurance on most of it.

If you take no salary at all and extract everything as dividends, the company won’t benefit from Corporation Tax relief on a salary, and you may not build a qualifying year for the State Pension.

This is why most directors typically pay themselves a salary and take the remainder of their income as dividends.

2026/27 tax thresholds

When working out the optimum salary to pay directors, here are the key tax thresholds to be aware of:

Income Tax:

• Personal Allowance: £12,570
• Basic rate limit: £50,270 (higher rate tax applies above this)
• Dividend allowance: £500
• Lower Earnings Limit (LEL): £6,708 (need to earn above this level to qualify for the State Pension)

National Insurance:

• Employees’ NIC threshold is the same as the Personal Allowance (£12,570)
• Employers’ NIC is 15% on salaries over £5,000 (this can be offset if your company qualifies for the Employment Allowance – see below)

Tax on salaries

Companies pay their employees via payroll, with taxes deducted at source through PAYE. Salaries may be subject to Income Tax, Employees’ NIC, and Employers’ NIC. All salaries are deducted from the company’s profits before Corporation Tax is calculated.

Most directors set a salary below the Income Tax and Employees’ NIC starting thresholds, while keeping the company’s Employers’ NIC as low as possible.

Two common salary levels

Many directors choose one of these salary levels, or a sum between them:

£6,708

At this level:

• No Income Tax is payable
• No Employees’ NIC is payable
• A small amount of Employers’ NIC is due
• It counts as a qualifying year towards the State Pension

This is a low-maintenance salary. Because the full Personal Allowance is not used at this level, the remainder of your income is taken as dividends.

£12,570

At this level:

• No Income Tax is payable
• No Employees’ NIC is payable
• Employers’ NIC applies on the amount above £5,000

The salary uses up the entire Personal Allowance, which reduces the taxable dividend income. There will be Employers’ NIC to pay, though this may be offset by the Employment Allowance (see below).

The impact of the Employment Allowance

If your company can claim the Employment Allowance, it can offset up to £10,500 of Employers’ National Insurance.

This can remove the Employers’ NIC cost on a £12,570 salary entirely, meaning the full salary reduces Corporation Tax with no additional NIC cost.

Importantly, single-director companies without other employees cannot claim the allowance, including many contractor companies.

Dividend tax in 2026/27

Dividends are taxed after your Personal Allowance is used, and the £500 dividend allowance is applied after that. Any further dividends are taxed at the relevant rates based on your total income.

For 2026/27, dividend tax rates have increased from the prior year:

• Basic rate band: 10.75% (up from 8.75% in 2025/26)
• Higher rate band: 35.75% (up from 33.75% in 2025/26)
• Additional rate band: 39.35% (unchanged)

Salary and other income use up your tax bands first, and dividends sit on top.

A typical salary and dividend combination

If they are able to do so, many directors aim to take a £12,570 salary and declare dividends, bringing their total income up to the higher-rate tax threshold of £50,270.

For example:

• £12,570 salary
• £37,700 in dividends

At this level, the salary is tax-free, the first £500 of dividends is tax-free, and the remainder is taxed at 10.75%. There is no National Insurance on dividends.

What happens above the basic rate band?

Above £50,270, dividends are taxed at a higher rate (35.75%) until £125,140 when the additional rate (39.35%) applies.

Another thing to be aware of is the erosion of the Personal Allowance if your total income reaches £100,000.

Known as the ‘60% tax trap’, the Personal Allowance is eroded by £1 for every £2 you earn above £100,000.

This is why many directors aim to keep their income within the basic and higher rate bands where possible.

Corporation Tax is paid before dividends

The company’s liabilities must be taken into account before a dividend declaration is made. This includes Corporation Tax on the company’s profits.

Here are the current Corporation Tax rates:

• 19% on profits up to £50,000
• 25% on profits over £250,000
• Marginal relief applies to profits between £50,000 and £250,000 (an effective rate of 26.5%)

Owning the company with a spouse or partner

If your spouse or partner also owns shares in the company, they can receive dividends separately.

This means their Personal Allowance (£12,570) and dividend allowance (£500) can be used independently, potentially keeping more income out of higher tax bands altogether.

There are some important caveats. The shares must be genuinely owned by the spouse – HMRC can challenge arrangements where the split looks artificial or where the spouse has no real economic interest in the business.

This is an area where professional advice is particularly valuable.

Company pension contributions

Employer pension contributions are one of the most tax-efficient ways to extract value from a company.

The company makes contributions directly into a director’s pension, which:

• Are deductible against Corporation Tax as a business expense
• Are not subject to Income Tax or National Insurance
• Do not count as personal income, so they don’t affect your tax bands or Personal Allowance

This makes them considerably more efficient than taking equivalent income as salary or dividends.

Importantly, any contributions must satisfy HMRC’s “wholly and exclusively” test. In other words, the amounts need to be commercially justifiable given the director’s role.

We can help discuss this with you before you make any large contributions to your pension.

Declaring dividends: the paperwork

You must make sure that you create the correct paperwork every time you make a dividend declaration.

• Board minutes – this confirms that sufficient retained profits exist and states the amount being declared
• A dividend voucher showing what was paid, to whom, and on what date

In the event of a tax enquiry, without this paperwork, HMRC may question whether a payment was a legitimate dividend at all and reclassify it as salary retrospectively.

FreeAgent and other accounting software can create these documents for you automatically.

When do you pay dividend taxes?

Any dividend income you receive should be declared via Self Assessment.

Tax on salary is automatically deducted via PAYE, but dividend distributions are not automatically reported to HMRC.

It is the director’s responsibility to file a tax return each year and pay any dividend tax due.

The deadline for submitting online Self Assessment returns is 31st January following the end of the tax year.

This is also the deadline for paying any tax you owe.

If you are new to contracting, we can help you register for Self Assessment.

When a higher salary may be appropriate

There are times when non-tax factors can influence how much profit you draw down from your company, for example:

• You need to make a mortgage application and demonstrate a certain level of earned income
• You need to make company pension contributions, which are often proportionate to salary
• Company profits are low, and you need to set realistic and affordable salary and dividend levels

Some common dividend-related issues

Dividends must be paid from retained profits

Dividends must be paid from retained profits – that is, profits remaining after you have accounted for the company’s liabilities, including Corporation Tax. If a dividend is paid when retained profits are insufficient, it may be deemed unlawful. HMRC can reclassify it as salary, making it subject to PAYE and National Insurance.

Other income affects the tax outcome

Your other sources of income must be factored in when setting salary and dividend levels. Rental or investment income, for example, can push you into a higher tax band and mean some dividends are taxed at a higher rate than planned.

Dividend timing can catch people out

Dividends are taxed in the tax year they are paid, not when they are earned. Payments around 5th April, therefore, need to be handled carefully.

The dividend allowance has shrunk significantly

When the dividend tax system was overhauled in 2016, the government at the time provided a £5,000 tax-free dividend allowance. Over the past decade, this has been gradually reduced, and it stands at just £500 today.

Please get in touch if you have any questions about salary and dividends, and how to draw down profits from your company. Call us on 0207 096 2659 or book a free discovery call with our expert accountants: Book a Call Back 

The rates and thresholds in this guide apply to England, Wales, and Northern Ireland.

Scotland has its own Income Tax bands and rates for non-savings, non-dividend income (such as salary), which differ from those in the rest of the UK. Dividend tax rates, however, remain the same UK-wide.