Almost every owner-managed limited company faces the same recurring question: how much of the money you take out should be salary, and how much should be dividends? The answer for 2026/27 is a deliberately low salary topped up with dividends, but the reasoning behind that split, and the exact figures, are worth understanding before you set your own. This guide walks through the mechanics and finishes with a full worked example for a director extracting £50,000.
Written by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
Last updated: August 2026
For 2026/27 the tax-efficient split for most directors is a £12,570 salary plus dividends. The salary uses the full personal allowance and is a corporation-tax-deductible company expense; dividends carry no National Insurance and are taxed at just 10.75% within the basic-rate band after a £500 tax-free dividend allowance.
A £12,570 salary triggers £1,135.50 of employer National Insurance (15% on the £7,570 above the £5,000 secondary threshold). A typical single-director company cannot claim the Employment Allowance, so that NI is not refunded — but it is itself deductible, so the salary still beats a lower one for most directors. Dividends are paid from profit that has already borne corporation tax at 19% (or up to 25%).
A limited company gives you two very different ways to pay yourself, and they are taxed on completely separate rules. Salary is an employment cost: it reduces the company's profit before corporation tax, but it attracts income tax, employee National Insurance and employer National Insurance. Dividends are a distribution of profit that has already been taxed inside the company: they carry no National Insurance at all and are taxed at lower headline rates than salary, but they are not a deductible expense.
Taking everything as salary is the worst of both worlds at most income levels. At a £50,000 salary you would pay £7,486 income tax, roughly £2,994 employee NI, and the company would pay a further £6,750 employer NI on top — over £17,000 in combined tax and NI before you keep a penny. Taking everything as dividends avoids all that NI but wastes the personal allowance and pays more corporation tax than necessary, because no salary is deducted before the corporation tax charge.
The efficient answer sits between the two. A salary large enough to use the personal allowance and reduce taxable company profit, but small enough to keep employee NI at zero, then dividends for everything else. That is why the standard 2026/27 recommendation is a £12,570 salary plus dividends.
£12,570 is the personal allowance for 2026/27. Salary at exactly this level is completely free of income tax and employee National Insurance, because employee NI at 8% only begins on earnings above £12,570. It also uses the whole personal allowance, so the first £12,570 of what you extract is entirely tax-free in your hands.
The one cost is employer National Insurance. The secondary threshold is £5,000 for 2026/27, and the company pays 15% on salary above it. On a £12,570 salary that is 15% × (£12,570 − £5,000) = £1,135.50. If your company can claim the £10,500 Employment Allowance — which generally requires at least two directors or employees on the payroll — that £1,135.50 is wiped out entirely. Most genuinely single-director companies cannot claim it, but the employer NI is still a deductible business cost, so the net drag is smaller than the headline figure.
A lower salary of £5,000 avoids employer NI completely, and £6,708 (the lower earnings limit) is the smallest salary that still earns a qualifying year toward your State Pension. These lower figures suit a sole director who wants zero payroll NI. For most directors, though, £12,570 wins: the corporation tax saved on the larger deductible salary outweighs the £1,135.50 of employer NI.
Dividends can only be paid from profit that has already paid corporation tax, so the company layer always comes first. For 2026/27, corporation tax is 19% on taxable profits up to £50,000 (the small profits rate) and 25% on profits above £250,000 (the main rate). Between those two thresholds, marginal relief applies and produces an effective rate that climbs smoothly from 19% to 25%.
The marginal rate on each extra pound of profit inside the £50,000–£250,000 band is about 26.5% — higher than either headline rate. That matters for the split: a pound moved out of profit and into a deductible salary or pension contribution can save 26.5p of corporation tax when the company is in that band, more than it saves at the 19% or 25% ends.
Because salary and employer NI are deducted before corporation tax, your extraction choices feed back into the company's tax bill. A £12,570 salary plus £1,135.50 employer NI removes £13,705.50 from taxable profit, which can be enough to keep a company under the £50,000 small profits threshold in a marginal year.
Once your salary is set, dividends do the rest of the work. Dividends stack on top of your salary in the income tax calculation. With a £12,570 salary, your dividends effectively begin at the bottom of the basic-rate band. The first £500 of dividend income is covered by the dividend allowance and taxed at 0%.
Above the £500 allowance, dividends are taxed at 10.75% within the basic-rate band, 35.75% in the higher-rate band and 39.35% in the additional-rate band for 2026/27. The basic-rate band runs to £50,270 of total income, so with a £12,570 salary you can draw roughly £37,700 of dividends before any of them touch the 35.75% higher rate.
The jump from 10.75% to 35.75% at the £50,270 threshold is large, and it is the single most important number in the split. Below it, dividends are cheap; above it, each extra pound of dividend costs more than three times as much tax. That is the point at which leaving profit in the company, or making a company pension contribution instead, usually beats taking more dividends.
The Employment Allowance lets eligible employers reduce their employer National Insurance bill by up to £10,500 a year. The catch for owner-managed companies is a specific exclusion: a company whose only employee paid above the secondary threshold is a single director cannot claim it. In practice that rules out the classic one-person contractor company.
For those companies, the £1,135.50 of employer NI on a £12,570 salary is a real, unrefunded cost. It is still worth paying in most cases, because the salary itself saves corporation tax: the £12,570 salary plus £1,135.50 employer NI is deductible, and at 19% that deduction saves about £2,604 of corporation tax — comfortably more than the NI cost. If minimising cash out the door matters more than optimising to the last pound, a £5,000 salary avoids the employer NI altogether while still deducting salary from profit.
If a second person — often a spouse who genuinely works in the business — is added to the payroll above the threshold, the company can usually claim the Employment Allowance, and the employer NI on modest director salaries is covered in full. This is a legitimate structure only where the second person's role and pay are real and commercially justified.
Take a single director who wants to draw £50,000 from the company across the year. The efficient split is a £12,570 salary plus £37,430 of dividends, giving £50,000 of total personal income — just under the £50,270 higher-rate threshold, so every dividend is taxed at the basic 10.75% rate.
Personal tax: income tax on the salary is £0 (covered by the personal allowance) and employee NI is £0 (salary is at the threshold). Dividend tax is (£37,430 − £500 allowance) × 10.75% = £3,970. Personal take-home is therefore about £50,000 − £3,970 = £46,030. That is an effective personal tax rate of under 8% on the £50,000 extracted.
Company side: to pay £37,430 of dividends the company needed £37,430 of post-corporation-tax profit, which at the 19% small profits rate came from about £46,210 of pre-tax profit (£8,780 corporation tax). Add the £12,570 salary and £1,135.50 employer NI and the company used roughly £59,915 of profit to put £50,000 in the director's hands and £46,030 after personal tax. Total tax across both layers — £8,780 corporation tax, £1,135.50 employer NI and £3,970 dividend tax — is about £13,886.
Compare that with taking the same £50,000 entirely as salary: £7,486 income tax, about £2,994 employee NI and £6,750 employer NI — over £17,200 in combined tax and NI, and a take-home of only about £39,520. The split leaves the director roughly £6,500 better off on the same £50,000 drawn. Plug your own profit and target income into the salary vs dividend calculator to see the split for your figures.
For most directors, £12,570 — it uses the full personal allowance, generates no income tax or employee National Insurance, and reduces taxable company profit. It triggers £1,135.50 of employer NI, which the Employment Allowance covers if the company is eligible; otherwise the corporation tax saved on the deductible salary still outweighs it. A £5,000 salary avoids employer NI entirely and suits a sole director who wants zero payroll NI.
With a £12,570 salary you can draw roughly £37,700 of dividends before your total income reaches the £50,270 higher-rate threshold. Within that band, dividends above the £500 allowance are taxed at 10.75%. Beyond £50,270 the rate jumps to 35.75%, so that is usually the point to consider retaining profit or making a pension contribution instead.
No. Dividends are paid out of profit that has already been charged to corporation tax — they are not a deductible expense. Only salary, employer NI and company pension contributions reduce taxable profit before the 19%–25% corporation tax charge is applied.
Usually not. A company whose only employee paid above the £5,000 secondary threshold is a single director is excluded from the Employment Allowance. Adding a second genuine employee or director paid above the threshold — for example a spouse who really works in the business — can restore eligibility.
Taking £50,000 as a £12,570 salary plus £37,430 of dividends, the personal tax is about £3,970 (dividend tax only), leaving roughly £46,030 take-home. Adding the company's £8,780 corporation tax and £1,135.50 employer NI, the total tax across both layers is about £13,886 — far less than the £17,200+ you would pay taking the same £50,000 entirely as salary.
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.