Salary vs Dividends 2026/27 — Optimal Strategy

Why most single-director companies take a low salary plus dividends

Salary is subject to National Insurance on both sides: employer NI at 15% on salary above £5,000 (a company cost) and employee NI at 8% on salary between £12,570 and £50,270 (a personal cost). Dividends are not subject to National Insurance at any level. For most directors, this creates a straightforward incentive to keep salary modest and extract the remainder as dividends.

The other consideration is corporation tax. A director salary is a company expense and reduces taxable profit before corporation tax at 19–25%. A dividend is paid from post-corporation-tax profit and does not reduce the corporation tax bill. This means the salary-versus-dividend decision always involves a trade-off between the NI cost of salary and the corporation tax saving it creates.

A third factor is the dividend allowance — £500 per year of dividend income that is tax-free. It is small but applies automatically, reducing the first £500 of dividend tax each year. For directors taking dividends consistently, it adds up to a modest ongoing saving with no planning required.

The optimal salary for 2026/27

Two salary levels dominate director planning: £9,100 (the employer NI secondary threshold) and £12,570 (the personal allowance). At £9,100, the company pays no employer NI on the salary, and the director pays no employee NI and no income tax. The salary reduces company profit by £9,100 before corporation tax. At the 19% small profits rate this saves £1,729 in corporation tax.

At £12,570, the company pays employer NI of approximately £1,139 (15% of £7,570). This employer NI is itself a deductible expense, reducing company profit by £13,709 in total. At the 19% rate, the combined deduction saves approximately £2,605 in corporation tax — roughly £876 more than the £9,100 salary option, partially offset by the £1,139 employer NI cost. At the 26.5% marginal rate, the advantage of the higher salary is larger.

For directors who are eligible for Employment Allowance — which requires at least one employee who is not a sole director — the employer NI on the £12,570 salary is offset by the allowance (up to £10,500 per year). If Employment Allowance is available, the £12,570 salary strategy becomes clearly more efficient, since the employer NI cost is covered by the allowance and the corporation tax saving on the full deduction still applies.

Dividend tax rates and the higher-rate crossover

Dividends are taxed at three rates. Within the basic rate band (total income up to £50,270), dividend tax is 8.75% on dividends above the £500 allowance. In the higher rate band (total income £50,271–£125,140), dividend tax is 33.75%. In the additional rate band above £125,140, the rate is 39.35%.

With salary set at £12,570 (using the personal allowance), a director can take approximately £37,700 in dividends before reaching the higher rate threshold. Total income at that point is £50,270. Dividend tax on £37,200 (dividends above the £500 allowance) at 8.75% is approximately £3,255. Combined with corporation tax paid at company level, the effective total tax on the original company profit is typically in the range of 30–35%, depending on the corporation tax rate.

Once dividends push total income above £50,270, the 33.75% rate applies to the excess. For directors who need to extract more than approximately £50,270 total income, leaving additional profit in the company or directing it to a company pension is usually more efficient than taking additional dividends at the higher rate. The crossover point at £50,270 is one of the most important planning thresholds in owner-managed company tax.

When dividends become less efficient

Higher-rate dividend tax at 33.75% still compares favourably to 40% income tax for the same income level. However, the personal allowance taper above £100,000 creates a zone of very high effective rates. For income between £100,000 and £125,140, each additional pound of income costs £1 of personal allowance — the effective marginal rate on income in this range is approximately 60% for salary income and approximately 56.25% for dividends. Directors approaching this range should model pension contributions and retained profit as alternatives to further extraction.

At very high extraction levels — above £150,000 or so — the additional rate of 39.35% on dividends and the loss of personal allowance mean that PAYE salary may in some cases produce a better effective rate than dividends for specific increments of extraction. This is counterintuitive but can arise where the personal tax saving from NI-free dividends is less than the corporation tax saving from a higher salary. Model the full picture rather than assuming dividends are always better.

Timing also matters. A director with high profits in one year but expected lower profits or lower personal income in future years may be better served by retaining profit now and extracting at basic-rate dividend rates later. The retained profit calculator on this site shows what remains available after chosen extraction, making it easier to identify how much to retain and how much to take.

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