If you own and run a UK limited company, you decide how you get paid. That decision is worth real money: the same company profit can leave the business as salary, as dividends, or as a mix, and each route meets a different set of taxes on the way out. This guide works through the arithmetic for the 2026/27 tax year (6 April 2026 to 5 April 2027), the year you are planning right now, and also gives you the 2025/26 figures you need for the Self Assessment return due by 31 January 2027.
The short version: a salary of £12,570 topped up with dividends is still the default answer for most director shareholders. The rest of this article explains why, and puts a pound figure on it.
The four taxes that decide the answer
Every pound of company profit you extract runs into some combination of four charges:
- Corporation tax. Profit paid out as salary is a deductible business expense, so it never gets taxed at company level. Profit paid out as a dividend is paid from post-tax profit, so corporation tax has already taken 19%, 25%, or an effective 26.5% in the marginal relief zone.
- Employer National Insurance. Charged on salary at 15% above a secondary threshold of just £5,000 a year. This is the tax that changed the landscape from April 2025 (it used to be 13.8% above £9,100) and it is why a lot of old blog advice is now wrong.
- Employee National Insurance. Charged on salary at 8% between £12,570 and £50,270, then 2%. Dividends carry no NI at all.
- Dividend tax. Paid personally, after a £500 dividend allowance, at rates that rose by two percentage points on 6 April 2026.
Salary is cheap for the company but expensive for you. Dividends are cheap for you but expensive for the company. The optimal split is simply the point where those two curves cross.
The 2026/27 numbers you need (and the 2025/26 ones)
| Item | 2025/26 | 2026/27 |
|---|---|---|
| Personal allowance | £12,570 | £12,570 |
| Basic rate band (taxable income) | £37,700 (up to £50,270) | £37,700 (up to £50,270) |
| Higher rate threshold / additional rate | £50,270 / £125,140 | £50,270 / £125,140 |
| Employee NI (primary threshold) | 8% from £12,570, 2% over £50,270 | 8% from £12,570, 2% over £50,270 |
| Employer NI rate / secondary threshold | 15% above £5,000 | 15% above £5,000 |
| Lower earnings limit (state pension credit) | £6,500 | £6,708 |
| Employment Allowance | £10,500 | £10,500 |
| Dividend allowance | £500 | £500 |
| Dividend ordinary rate | 8.75% | 10.75% |
| Dividend upper rate | 33.75% | 35.75% |
| Dividend additional rate | 39.35% | 39.35% |
| Corporation tax: small profits / main | 19% to £50,000, 25% over £250,000 | 19% to £50,000, 25% over £250,000 |
| Effective CT rate between £50k and £250k | 26.5% | 26.5% |
Sources: Rates and thresholds for employers 2026 to 2027, Tax on dividends, Corporation Tax rates and Marginal Relief for Corporation Tax. The dividend rate increase is set out in HMRC's technical note on tax rates for property, savings and dividend income.
Why £12,570 and not £5,000
Since employer NI now starts at £5,000, plenty of advisers floated the idea of capping the director's salary at exactly £5,000 to avoid it. The maths says otherwise, and here is the cleanest way to see it.
Take one pound of pre-tax company profit and push it out through each route, for salary in the band between £5,000 and £12,570 (where you pay no income tax and no employee NI, because the personal allowance and the primary threshold both sit at £12,570):
- Salary route. £1 of profit has to cover the salary plus 15% employer NI on it. So the gross salary is 1 / 1.15 = 86.96p, and you keep all of it. No income tax, no employee NI.
- Dividend route. £1 of profit pays 19% corporation tax, leaving 81p to distribute. Covered by your personal allowance, the dividend is tax free, so you keep 81p.
Salary wins by almost 6p in the pound, even paying employer NI at 15%, and even before the Employment Allowance is considered. The reason is that the personal allowance is not "used up" by a low salary: unused personal allowance is set against your dividends anyway. So dropping salary to £5,000 does not buy you a tax-free dividend slice you would not otherwise have had. It just swaps a 15% employer NI charge for a 19% (or 26.5%) corporation tax charge, and loses the deduction.
Across the £7,570 that sits between £5,000 and £12,570, that gap is worth roughly £519 a year at the 19% corporation tax rate, and considerably more if your profits are in the marginal relief zone (see the worked example below).
The state pension argument, which is not a rounding error
A salary of £12,570 is above the lower earnings limit (£6,708 in 2026/27), so it buys you a qualifying year towards the state pension without a single penny of employee NI actually being paid. A £5,000 salary is below the LEL and buys you nothing. Voluntary Class 3 NI to plug a missing year currently costs several hundred pounds, so this is not a soft benefit: it is cash.
Where the Employment Allowance changes things
The Employment Allowance is worth up to £10,500 of employer NI a year, and if you can claim it, the 15% employer NI on a £12,570 salary (£1,135.50) disappears entirely, making the salary route even more attractive.
The catch is the single-director rule. Per HMRC's NIM06545, a company cannot claim the allowance if it has only one director and that director is the only employee earning above the secondary threshold. So:
- One-person company: no Employment Allowance. Employer NI on a £12,570 salary costs £1,135.50, reduced to £919.76 after corporation tax relief at 19%. Salary still wins, but by a slimmer margin.
- Two or more people paid above £5,000 (for example, a second director, or a spouse genuinely working in the business): the allowance is available and covers the employer NI outright.
Worked example: £70,000 of profit, one director
Company with a 31 March 2027 year end, one director shareholder, no other employees (so no Employment Allowance), profit of £70,000 before the director's pay, and the director wants all of it out.
Option A: salary £12,570, rest as dividends
- Employer NI: (£12,570 - £5,000) x 15% = £1,135.50
- Profit after salary and employer NI: £70,000 - £12,570 - £1,135.50 = £56,294.50
- Corporation tax with marginal relief: (£56,294.50 x 25%) - (3/200 x (£250,000 - £56,294.50)) = £14,073.63 - £2,905.58 = £11,168.04
- Dividend available: £56,294.50 - £11,168.04 = £45,126.46
- Personal tax: salary uses the £12,570 personal allowance. Of the dividends, £500 is covered by the dividend allowance, £37,200 falls in the basic rate band at 10.75% (£3,999.00), and £7,426.46 falls above £50,270 at 35.75% (£2,654.96). Dividend tax = £6,653.96
- Net cash to the director: £51,042.50
Option B: salary £5,000, rest as dividends
- Employer NI: nil (salary is at the secondary threshold)
- Corporation tax on £65,000: (£65,000 x 25%) - (3/200 x £185,000) = £16,250 - £2,775 = £13,475
- Dividend available: £65,000 - £13,475 = £51,525
- Personal tax: £7,570 of unused personal allowance covers part of the dividends, £500 dividend allowance, £37,200 at 10.75% (£3,999.00), £6,255 at 35.75% (£2,236.16). Dividend tax = £6,235.16
- Net cash to the director: £50,289.84
| Outcome | Option A: £12,570 salary | Option B: £5,000 salary |
|---|---|---|
| Employer NI | £1,135.50 | £0 |
| Corporation tax | £11,168.04 | £13,475.00 |
| Dividend tax | £6,653.96 | £6,235.16 |
| Total tax | £18,957.50 | £19,710.16 |
| Net in the director's pocket | £51,042.50 | £50,289.84 |
Option A wins by £752.66, and it also secures a qualifying year for the state pension. Notice that Option A pays more employer NI and more dividend tax, and still comes out ahead, because the corporation tax deduction on the salary and the NI is worth more than both. That is the whole argument in one table. You can rerun this with your own profit figure in the BizTaxCalc salary vs dividends calculator.
Why you should not push salary above £12,570
Above the personal allowance, the salary route immediately gets worse. One pound of profit becomes 86.96p of gross salary, which is then hit by 20% income tax and 8% employee NI, leaving 62.61p. The same pound taken as a dividend suffers 19% corporation tax and 10.75% dividend tax, leaving 72.29p (and 65.60p even at the 26.5% marginal corporation tax rate). Dividends win at every income level above the personal allowance, and the gap widens in the higher rate band. The crossover point really is £12,570, which is why that number keeps showing up.
The thresholds that bite once dividends get large
- £50,270. With a £12,570 salary, you can take £37,700 of dividends before the upper rate starts. Tax on that package in 2026/27: £37,200 at 10.75% = £3,999, leaving £46,271 net.
- £100,000. Above this, the personal allowance tapers by £1 for every £2 of income, which creates an effective marginal rate on dividends of around 53.6% between £100,000 and £125,140. Pension contributions from the company are the usual fix.
- £125,140. Dividends above this are taxed at 39.35%, the one dividend rate that did not go up in April 2026.
What the dividend rate rise actually costs you
The two-point increase from 6 April 2026 is simple to quantify: it costs 2% of every taxable dividend pound in the basic and higher bands. On a standard £12,570 salary plus £37,700 dividends package, dividend tax rises from £3,255 (2025/26 at 8.75%) to £3,999 (2026/27 at 10.75%), a £744 increase for identical income. On the £70,000 example above, the same profit would have produced roughly £900 more net cash under last year's rates. Nothing about the structure changes, but the incentive to leave surplus profit in the company, or route it into a pension, is now stronger. Model your own numbers with the UK dividend tax calculator.
Get the paperwork right, or the tax planning collapses
A dividend is only a dividend if the company had distributable profits when it was declared. Cash in the bank is not the test: profit after corporation tax is. Before each dividend, prepare a board minute and a dividend voucher showing the date, the shareholder, and the amount. See GOV.UK on taking money out of a limited company.
Money taken without profits behind it is not a dividend, it is a director's loan. If the balance is still outstanding nine months and one day after the year end, the company pays a section 455 charge (set in law at the dividend upper rate) on the outstanding amount, refundable only once the loan is repaid. It is an expensive way to discover you paid yourself out of order.
Key dates: run the £12,570 salary through PAYE and RTI (directors' NI is calculated on an annual basis, so monthly payments are fine); pay corporation tax nine months and one day after the year end; and file your Self Assessment return, which reports the dividends, by 31 January following the tax year, per the Self Assessment deadlines. The 2025/26 return is due by 31 January 2027.
Three refinements worth considering
- Employer pension contributions. Deductible for corporation tax, no employer NI, no income tax for you, and they sidestep dividend tax entirely. For profit you do not need this year, this is usually the highest-return move available.
- A spouse or partner as a genuine second employee. Paying them above £5,000 can unlock the Employment Allowance, and if they hold shares and have unused basic rate band, dividends to them are taxed at 10.75% rather than 35.75%. The shares must be real ordinary shares, and the settlements legislation applies, so take advice.
- Scottish taxpayers. Scottish income tax rates apply to your salary, but a £12,570 salary is fully covered by the UK-wide personal allowance, so the recommendation does not change. Dividends are always taxed at UK rates and UK band limits, wherever you live.
This article is general information, not personal tax advice. The figures are 2026/27 UK rates, verified against GOV.UK.