The salary versus dividends decision is the central planning question for most owner-managed limited companies. The answer involves both company and personal tax layers simultaneously, and getting it broadly right is worth more than any other planning decision most directors will make.
Written by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
Take a £12,570 salary and top it up with dividends. The salary uses your personal allowance (no income tax, no employee NI) and is deductible for the company; dividends carry no National Insurance and are taxed at 10.75%/35.75%/39.35% after the £500 allowance.
Employer NI on the salary is £1,135.50, but the corporation-tax saving on the deduction outweighs it - so £12,570 beats a lower salary for most one-person companies.
Why £12,570 and not more? It uses the entire personal allowance, so not a penny of income tax lands on it, and it stays under the point where employee NI bites. Here is what the salary costs and saves.
| Salary | £12,570 |
| Income tax on the salaryFully covered by the £12,570 personal allowance | £0 |
| Employee (primary) NI8% only starts above £12,570 | £0 |
| Employer (secondary) NI15% on the £7,570 above the £5,000 threshold | £1,135.50 |
| Company deduction (salary + employer NI) | £13,705.50 |
The whole £13,705.50 comes off profit before corporation tax. Even if you cannot claim the Employment Allowance (a lone director usually cannot), the corporation-tax saving on that deduction outweighs the £1,135.50 employer NI, so £12,570 still beats a lower salary for most one-person companies.
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.
For 2026/27 the optimal director salary is £12,570 (the personal allowance). Two lower reference points also matter: £5,000 (the employer NI secondary threshold, below which no employer NI is due) and £6,708 (the lower earnings limit, the lowest salary that still secures a qualifying State Pension year). At £12,570 the director pays no employee NI and no income tax, and the salary reduces company profit before corporation tax. At the 19% small profits rate the £12,570 deduction alone saves £2,388 in corporation tax.
At £12,570, the company pays employer NI of £1,135.50 (15% of £7,570). If the company is eligible for the Employment Allowance (2+ payrolled employees or directors), that £1,135.50 is fully covered and the net employer NI is £0. Otherwise the employer NI is itself a deductible expense, reducing company profit by £13,705.50 in total; at the 19% rate the combined deduction saves approximately £2,604 in corporation tax, which outweighs the £1,135.50 employer NI cost. At the 26.5% marginal rate the advantage of the £12,570 salary is larger still.
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.
Dividends are taxed at three rates. Within the basic rate band (total income up to £50,270), dividend tax is 10.75% on dividends above the £500 allowance. In the higher rate band (total income £50,271–£125,140), dividend tax is 35.75%. 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 10.75% 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 35.75% 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.
Higher-rate dividend tax at 35.75% 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.
£12,570 for most directors, using the full personal allowance. The £1,135.50 employer NI is either covered by the Employment Allowance (companies with 2+ payrolled employees) or outweighed by the corporation tax saving on the larger deduction. A lower salary of £5,000 (zero employer NI) or £6,708 (State Pension credit) suits a sole-director company wanting to avoid triggering payroll NI.
10.75% on dividends above the £500 allowance, where total personal income is within the basic rate band (up to £50,270). The higher rate is 35.75% and the additional rate is 39.35%.
When total personal income exceeds £50,270, dividend tax rises from 10.75% to 35.75%. Above £100,000, the personal allowance taper creates effective rates as high as 56.25% on dividends. At these levels, pension contributions and retained profit are usually more efficient than further dividend extraction.
Yes. If Employment Allowance is available (the company has 2+ payrolled employees or directors, not a single sole director), the £1,135.50 employer NI on a £12,570 salary is fully offset by the allowance, so it costs nothing. Even without the allowance, £12,570 remains optimal because the corporation tax saving on the deduction outweighs the employer NI.
The rates and rules on this page are drawn from the official UK government sources below, using the confirmed 2026/27 figures. Each link opens the relevant HMRC, GOV.UK or Companies House page in a new tab.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.