A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
Run your business through a limited company and the way you pay yourself has a direct effect on what lands in your pocket. The familiar route, a modest salary topped up with dividends, still does the job in 2026/27. The numbers behind it have moved, though, so it's worth a fresh look.
Why a small salary plus dividends?
A salary is a deductible expense for the company, and pitched at the right level it protects your entitlement to the State Pension and other benefits. Dividends come out of post-tax profit, but they're taxed at lower rates than salary and carry no National Insurance. Blend the two and you'll usually do better than taking the lot as salary.
The salary decision in 2026/27
The snag is employer National Insurance. The secondary threshold is just £5,000, and employer NIC above it runs at 15%. That leaves two strategies that come up again and again:
- Salary of £5,000: no employer NIC at all, though on its own it sits below the level that secures a qualifying year for the State Pension.
- Salary up to the personal allowance of £12,570: this secures a qualifying year and maximises the corporation-tax deduction, at the cost of a little employer NIC on the slice above £5,000.
If your company can claim the Employment Allowance (£10,500), broadly those with more than one person on the payroll, the higher salary is often the clear winner because the allowance mops up the employer NIC. Single-director companies usually can't claim it, so the sums are tighter and genuinely worth running before you decide.
Dividends and that £500 allowance
The dividend allowance is only £500, so dividends are taxed almost straight away. For 2026/27 the rates are:
- 8.75% within the basic-rate band;
- 33.75% within the higher-rate band;
- 39.35% within the additional-rate band.
With the higher-rate threshold frozen at £50,270, it's easy to slide into 33.75% dividend tax as profits build. Spreading the timing of dividends across tax years helps, and so does using a spouse's allowances and bands, provided they're a genuine shareholder rather than one on paper.
Don't lose sight of the bigger picture
Company pension contributions are one of the most efficient ways to take profit out: fully deductible and free of NIC. For some directors a larger salary or a director's pension beats extra dividends outright. What's right for you comes down to your profit level, your other income and where you're heading next.
Let us run your numbers
We build a tailored salary-and-dividend plan for our company clients each year, and we handle the payroll and dividend paperwork that keeps it compliant. If you'd like us to check you're taking pay in the most efficient way for 2026/27, book a free consultation.