Salary vs Dividends: Optimal Split for Company Directors 2026/27

Why Directors Choose Salary Plus Dividends

A sole-director limited company owner typically extracts income through a combination of salary and dividends rather than salary alone. The reason is straightforward: salary above the National Insurance thresholds attracts employer NI at 15% (from the company) and employee NI at 8% (from the director personally). Dividends, paid from post-corporation-tax profits, attract no National Insurance at all. Dividend tax rates are also lower than income tax rates on salary: 8.75% basic rate versus 20% income tax, and 33.75% higher rate versus 40% income tax.

The trade-off is that the company must first pay corporation tax on its profits before any dividends can be distributed. Salary, by contrast, is deductible as a business expense and reduces the profits on which corporation tax is charged. The optimal salary level sits at the point where the corporation tax saving from the salary deduction exactly offsets (or exceeds) the personal NI cost of paying the salary. For 2026/27, this analysis points to two main salary strategies.

Optimal Salary Options for 2026/27

Option 1, £9,100 salary (lower earnings limit): At this level, the director pays no employee NI and the company pays no employer NI. The salary qualifies as a deductible expense, saving the company corporation tax at 19% or 25% on the amount deducted. No income tax is payable on the salary (well below the £12,570 Personal Allowance). The director also accrues a qualifying year for State Pension purposes. This is often the preferred option for directors who want to eliminate NI entirely.

Option 2, £12,570 salary (Personal Allowance): This fully utilises the Personal Allowance, so no income tax is paid on the salary. However, salary above the secondary NI threshold (approximately £5,000 for employers from April 2026) attracts employer NI at 15%. On the portion from £5,000 to £12,570 = £7,570, employer NI = £7,570 × 15% = £1,136. This £1,136 is itself deductible for corporation tax, so the net cost to the company at the main 25% rate is £1,136 × (1 − 0.25) = £852. For many directors at the main corporation tax rate, the extra personal allowance saving (no income tax on an extra £3,470 of salary compared to the £9,100 option) makes this worthwhile. At the small company 19% rate, the calculus is closer.

Above £12,570, salary becomes increasingly inefficient. Employee NI at 8% kicks in, and both employee and employer NI are payable. Taking income as dividends above this point is almost always more tax-efficient.

Corporation Tax: The Company-Side Cost

For 2026/27, corporation tax is 19% on profits up to £50,000, 25% on profits above £250,000, and subject to marginal relief on profits between £50,000 and £250,000. Dividends are paid from post-tax profit, so a company earning £100,000 of profit pays £25,000 corporation tax (at the main rate) and has £75,000 available for dividends. If the director wants £60,000 of dividends, the company must have generated at least £80,000 of profit to cover both the tax and the dividend.

This is the key reason why salary and dividends are not directly comparable without modelling the company-level position. Salary reduces corporation tax; dividends do not. A £1 of salary costs the company £1 (minus the corporation tax saving), while a £1 of dividend requires approximately £1.33 of pre-tax profit at the 25% rate.

Worked Example: Taking £90,000 from a Limited Company

Scenario: A sole director owns a limited company. The company earns £140,000 of profit before the director's remuneration. The director wants to extract £90,000 of personal income. Two options are compared: all salary versus optimal salary-plus-dividend split.

Option A, All salary, £90,000: The company deducts £90,000 as a salary expense. Employer NI at 15% on salary above £5,000 = (£90,000 − £5,000) × 15% = £12,750 (also deductible). Company taxable profit after remuneration: £140,000 − £90,000 − £12,750 = £37,250. Corporation tax at 19% = £7,078. Director receives £90,000 salary. Income tax: 20% on (£90,000 − £12,570) = 20% × £77,430 = £15,486; 40% on (£90,000 − £50,270) = 40% × £39,730 = £15,892. Employee NI: 8% on (£50,270 − £12,570) = £3,016; 2% on (£90,000 − £50,270) = £794. Director's total personal tax: £15,486 + £15,892 + £3,016 + £794 = £35,188. Total tax (company + personal): £7,078 + £35,188 + £12,750 employer NI = £55,016.

Option B, £12,570 salary + £77,430 dividends: Salary £12,570; employer NI on £7,570 × 15% = £1,136 (deductible). Company taxable profit: £140,000 − £12,570 − £1,136 = £126,294. Corporation tax at 25% (with marginal relief consideration, broadly 25% on profits above £250k but marginal relief applies here): at £126,294 profit, marginal relief applies. Approximate corporation tax using effective marginal rate of ~26.5% = around £33,468. Post-tax profit available for dividends: £126,294 − £33,468 = £92,826. Dividend declared: £77,430. Director's personal tax: income tax on salary = nil (covered by Personal Allowance). Dividend tax: £500 allowance free, remaining basic-rate band = £50,270 − £12,570 = £37,700. Taxable dividends: £77,430 − £500 = £76,930. Basic-rate tax: 8.75% × £37,700 = £3,299. Higher-rate tax: 33.75% × (£76,930 − £37,700) = 33.75% × £39,230 = £13,240. Director's total personal tax: £3,299 + £13,240 = £16,539. Total tax (company + personal): £33,468 + £16,539 + £1,136 employer NI = £51,143. Saving versus Option A: approximately £3,873.

The salary-plus-dividend structure saves around £3,900 in this scenario. The saving is larger at lower income levels (where more dividends fall in the 8.75% basic-rate band rather than the 33.75% higher-rate band) and can exceed £10,000 per year for directors whose total income stays below £50,270.

Employer NI from April 2026

From April 2026, employer National Insurance is 15% on salary above the secondary threshold (approximately £5,000). This rate increased from 13.8% in April 2025 as part of the government's employer NI changes. The higher employer NI rate makes low salary strategies more attractive: the cost of paying salary above the secondary threshold has increased, strengthening the case for minimising salary and maximising dividends.

Directors should model this using the current 15% employer NI rate for 2026/27. The secondary threshold of approximately £5,000 means no employer NI is payable on salary up to this amount, making the £5,000–£9,100 salary range effectively free of employer NI. Above £9,100, employer NI accrues at 15% on each additional pound of salary.