Is a dividend or salary more tax-efficient in 2026/27?

For most director-shareholders, a combination of a low salary plus dividends is more tax-efficient than salary alone, because dividends avoid National Insurance. However, the advantage depends on income level and the company's corporation tax rate. Above £50,270 total income, the advantage narrows considerably.

What is the difference in tax between salary and dividends at basic rate?

At the basic rate, salary income attracts 20% income tax and 8% employee NI (plus 15% employer NI). Dividend income attracts 8.75% dividend tax with no NI. The tax saving on dividends versus salary at basic rate can be over 15 percentage points when employer NI is included in the comparison.

Can I choose to take salary instead of dividends from my company?

Yes. If you are a director-shareholder you have flexibility in how income is extracted from the company. The company can pay salary (with NI and income tax) or dividends (from post-corporation-tax profits, with dividend tax but no NI). Most directors use a combination.

Guide + comparison

Dividend vs Salary: Tax Comparison for Directors 2026/27

Should you take income as salary or as dividends? This page compares the tax on each approach at multiple income levels, using 2026/27 rates, and explains why a combination of low salary plus dividends is usually optimal.

Last updated for the 2026/27 tax year.

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Why the comparison matters

Salary and dividends are taxed very differently. Salary attracts income tax (20%, 40%, 45%) and National Insurance — employee NI at 8% up to £50,270, 2% above that, plus employer NI at 15% on salary above £5,000. Add those up and the combined burden can exceed 60% at higher income levels.

Dividends carry no NI at all. Dividend tax rates apply instead: 8.75% basic, 33.75% higher, 39.35% additional. But the company has to pay corporation tax (19% or 25%) before any dividend can be paid out. So the comparison is never just dividend rate versus income tax rate — you need to look at both the company side and the personal side together.

Tax rates comparison table 2026/27

Income band	Salary: income tax	Salary: employee NI	Dividend tax
£12,571, £50,270	20%	8%	8.75%
£50,271, £125,140	40%	2%	33.75%
Above £125,140	45%	2%	39.35%

Salary also attracts employer NI at 15% on amounts above ~£5,000. Dividends attract no NI of any kind. Corporation tax (19% or 25%) is paid on profits before dividends are declared.

Worked example: £40,000 of extraction

A director wants to take £40,000 of personal income from their company in 2026/27. Two ways to do it:

Option A, All salary (£40,000):

Income tax: 20% on (£40,000 − £12,570) = £5,486
Employee NI: 8% on (£40,000 − £12,570) = £2,194
Employer NI: 15% on (£40,000 − £5,000) = £5,250 (company cost)
Corporation tax saved (salary deductible): 19% × £40,000 = £7,600
Director's personal tax: £7,680

Option B, £12,570 salary + £27,430 dividends:

Income tax on salary: £0 (fully covered by Personal Allowance)
Employee NI: approximately £0 (salary at primary threshold)
Employer NI: approximately £1,136 (15% on £7,570)
Corporation tax on remaining profits: paid before dividends
Dividend tax: £500 allowance free. Remaining £26,930 × 8.75% = £2,356
Director's personal tax: £2,356, a saving of over £5,000 versus all-salary

The saving is largest while dividends stay within the basic-rate band. Once total income passes £50,270, the 33.75% higher-rate dividend tax starts to eat into that gap.

When the advantage shrinks

In the higher-rate band, salary costs 40% income tax plus 2% NI — 42% in total. Dividends cost 33.75%. That is an 8.25 percentage point saving, still meaningful, and no NI on dividends remains a real benefit.

In the additional-rate band, salary costs 45% plus 2% NI — 47%. Dividends cost 39.35%, a 7.65 percentage point saving. At every income level, dividends beat salary on personal tax. The caveat is always corporation tax on the profits before any dividend is paid.

Related resources

Director dividend calculator Full salary vs dividends guide Optimal director salary mix Director dividend tax calculator All calculators

Frequently asked questions

Is dividend income always more tax-efficient than salary?

For director-shareholders, a salary-plus-dividends combination is almost always more efficient than salary alone at income levels up to around £125,140. The main advantage is that dividends carry no NI. The caveat is that the company pays corporation tax on profits before dividends can be paid.

What salary and dividend split is most common for directors?

Most directors take a salary of £9,100 (no NI for either party) or £12,570 (uses full Personal Allowance, some employer NI payable). The rest of the income need is met with dividends, keeping total income below £50,270 where possible to stay in the 8.75% basic-rate dividend band.

Do employees (non-directors) benefit from taking dividends?

No. Employees who do not own shares cannot choose to take dividends in place of salary, dividends can only be paid to shareholders. The salary-vs-dividend comparison only applies to director-shareholders of limited companies.

Disclaimer: This page is for general information only. Consult a qualified accountant or tax adviser for advice on your specific circumstances.