Written and reviewed by James Whitfield · Updated for 2026/27 · Editorial standards · Methodology
Most UK limited company directors use a combination of salary and dividends rather than taking all income one way. This guide explains why, what the optimal mix looks like in 2026/27, and what factors change the answer.
Taking all income as salary is inefficient for most directors because salary above the personal allowance (£12,570) is subject to both income tax and National Insurance — employee NI at 8% between £12,570 and £50,270, plus employer NI at 15% on salary above £5,000, which is a company cost. At higher incomes, combining salary with dividends reduces the NI burden because dividends carry no NI.
Taking all income as dividends is also inefficient because you lose the corporation tax deduction that director salary provides. A salary up to the personal allowance is both NI-efficient and reduces the company's taxable profit, saving corporation tax on the amount deducted.
The standard approach for 2026/27 is: director salary at or around £12,570 (no income tax, minimal employer NI but below the personal allowance which eliminates it), then fill the remaining basic-rate band (up to £50,270) with dividends, taxed at 10.75% above the £500 dividend allowance.
Two salary levels are commonly modelled for 2026/27. At £12,570 (the personal allowance): no income tax on the salary, but employer NI at 15% on £7,570 above the £5,000 secondary threshold = £1,135.50 of employer NI. The salary reduces company profit by £12,570 + £1,135.50 = £13,705.50, saving corporation tax at your applicable rate.
At £5,000 (the secondary threshold): no employer NI at all. Salary reduces company profit by £5,000, saving corporation tax. But you lose the corporation tax deduction on the £7,570 between £5,000 and the personal allowance.
At the 19% small profits rate, the corporation tax saving from the £12,570 salary (after deducting the employer NI cost) is approximately £13,705.50 × 19% = £2,604. The employer NI cost is £1,135.50. Net benefit of the higher salary = £2,604 − £1,135.50 = £1,468.50. So the salary at £12,570 is still worth taking even accounting for the employer NI. At the 25% main rate, the saving is even larger.
However, personal circumstances matter: if you have other income that has already used your personal allowance, taking a £12,570 director salary will create income tax as well as employer NI, and the calculation changes significantly.
Dividends above the £500 dividend allowance are taxed at: 10.75% in the basic rate band (income up to £50,270), 35.75% in the higher rate band (income between £50,270 and £125,140), and 39.35% in the additional rate band (income above £125,140).
The dividend allowance applies to the first £500 of dividend income. Above that, the applicable rate depends on where the dividends fall in your personal income bands — salary is counted first, then dividends.
For a director taking £12,570 salary and dividends filling the basic rate band: dividends up to £50,270 − £12,570 = £37,700. First £500 is tax-free (dividend allowance). Remaining £37,200 taxed at 10.75% = £3,999. Total personal tax on the dividend portion is approximately £3,999.
Once your total income (salary plus dividends) exceeds £50,270, additional dividends are taxed at 35.75%. At this level, the combined effective rate on the additional income (corporation tax already paid on company profit, then dividend tax on the after-tax amount) starts to rival employment income tax rates.
At £50,270 income, the effective combined rate on extraction from a company paying 25% corporation tax is roughly: 25% (corporation tax) + 35.75% on the post-tax amount = 25% + (35.75% × 75%) = approximately 51.8%. This is higher than the 40% higher-rate income tax plus NI that an employee pays on the same amount.
The efficiency advantage of a limited company is strongest in the basic rate band. For income below £50,270 combined with a standard salary, the limited company route is typically more efficient. Above that level, the picture is less clear and personal tax advice is worthwhile.
The salary vs dividend calculator on this site lets you adjust both variables and see the impact on personal take-home, corporation tax and retained profit simultaneously. The key outputs to watch are: total personal tax (income tax + NI), total company tax (employer NI + corporation tax), and what is left in the company after all deductions.
The most efficient combination for a director with no other income taking £12,570 salary and basic-rate dividends will show a significantly higher personal take-home than the same gross profit extracted purely as salary through PAYE.
Most directors benefit from a combination: salary at or around £12,570 (below the income tax threshold), then dividends to fill the basic rate band up to £50,270. This minimises NI while maintaining a corporation tax deduction for the salary element.
10.75% on dividends above the £500 dividend allowance, where the dividends fall within the basic rate band (total income up to £50,270).
For most directors, dividends are more tax-efficient for amounts above the personal allowance because they carry no NI. But a salary up to the personal allowance (£12,570) is also worth taking for the corporation tax deduction it provides, despite triggering employer NI above £5,000.
Dividends do not count as earnings for NI purposes and do not build State Pension entitlement. A director salary of at least £6,396 (the lower earnings limit for 2026/27) is needed to count the year as a contributory year for State Pension, even if no NI is actually paid.