Written by UKDividendTaxCalculator Editorial. Reviewed against official UK guidance. Methodology
Dividend Tax for Company Directors, Salary Plus Dividends
How limited company directors structure salary and dividends in 2026/27: £5,000 vs £12,570 salary, NI savings, 10.75%/35.75% dividend tax rates and worked example showing the effective rate on combined income.
The Typical Director Structure
Most sole-director limited company owners take a low salary, typically around £5,000 to £12,570, and draw the remainder of their income as dividends from post-corporation-tax profits. This structure exists for two reasons: first, dividends are not subject to National Insurance (either employee or employer), whereas salary attracts employee NI at 8% (up to £50,270) and employer NI at 15%; second, dividend tax rates are lower than income tax rates on salary at the same income level.
A salary of £5,000 (the employer secondary threshold) means the company pays no employer NI and the director pays no employee NI on the salary; a salary of £6,708 (the lower earnings limit) still costs the company only a small amount of employer NI while securing a qualifying State Pension credit year. A salary of £12,570 (the personal allowance) eliminates income tax on the salary but does attract employer NI on the portion above the secondary threshold of £5,000. For most directors £12,570 is optimal: it uses the full personal allowance, and the £1,135.50 employer NI (15% × (£12,570 − £5,000)) is either covered by the £10,500 Employment Allowance (for companies with two or more payrolled employees) or is corporation-tax deductible and outweighed by the CT saving on the larger salary deduction.
Calculating the Effective Rate, Worked Example
Consider a director with a £12,570 salary and £50,000 in dividends, total income £62,570. Income tax on salary: the £12,570 salary is entirely within the personal allowance (£12,570), so nil income tax on salary. Employee NI on salary: nil (at the primary threshold). Employer NI: 15% on the excess above the secondary threshold of £5,000, i.e. 15% × (£12,570 − £5,000) = £1,135.50 paid by the company (covered by the £10,500 Employment Allowance where the company qualifies, otherwise corporation-tax deductible).
On the £50,000 of dividends: personal allowance is £12,570, fully used by salary, leaving nil personal allowance for dividends. The first £500 is the dividend allowance (nil tax). Dividends now assessed: £50,000 − £500 = £49,500. The remaining basic-rate band is £50,270 − £12,570 = £37,700. Because the £500 dividend allowance uses up £500 of the basic-rate band, £37,200 of the £49,500 taxable dividends falls in the basic-rate band at 10.75% = £3,999; the remaining £12,300 falls into the higher-rate band at 35.75% = £4,397. Total dividend tax: approximately £8,396. The director's effective personal tax rate on £62,570 total income is approximately 13.4%.
The Dividend Allowance Within the Structure
The £500 dividend allowance is factored into the calculation above, it sits within the basic-rate band after the personal allowance is used by salary. For a director with a low salary, the personal allowance shelters considerably more income than the dividend allowance, making the dividend allowance a relatively minor component of the overall saving. Its main value is for directors whose salary already uses the full personal allowance, where the £500 allowance provides a small additional exempt amount at the bottom of the dividend assessment.
When the Structure Stops Being Tax-Efficient
Above total income of £50,270, dividends start attracting 35.75%, the higher-rate dividend tax. For a director taking a £12,570 salary, dividends are taxed at 10.75% up to total income of £50,270, and at 35.75% above that. The structure remains more tax-efficient than equivalent salary income above £50,270 (where salary would attract 40% income tax and 2% NI), but the advantage narrows significantly.
Above £125,140, dividends are taxed at the additional rate of 39.35%. At this point, directors with very high incomes may benefit from reviewing the corporation tax position more carefully, particularly if profits are being retained in the company rather than extracted, which can trigger complex rules around close companies. Taking large employer pension contributions directly from the company is often more efficient than dividends above the higher-rate threshold.
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FAQ
What salary should a director take in 2026/27?
For most directors £12,570 is optimal: it uses the full personal allowance, and the ~£1,136 employer NI is covered by the £10,500 Employment Allowance (where eligible) or is corporation-tax deductible. A lower salary of £5,000 (secondary threshold, zero employer NI) or £6,708 (lower earnings limit, State Pension credit) is an alternative for single-director companies wanting minimal payroll.
Is dividend income always more tax-efficient than salary for a director?
Yes for most income levels, because dividends avoid NI entirely. However above £50,270 the advantage reduces, and above £125,140 the comparison is closer. Always model the combined personal and company tax position.
At what income does the higher-rate dividend tax kick in?
When total income (salary plus dividends) exceeds £50,270. For a director with a £12,570 salary, the higher 35.75% rate begins to apply when dividends take total income above £50,270.