Key takeaways
- A salary is a business expense and goes through payroll; dividends come out of profit after Corporation Tax and carry no National Insurance.
- For 2026 to 2027, dividends above the £500 allowance are taxed at 10.75%, 35.75% or 39.35%, depending on your Income Tax band.
- Dividend rates rose by two percentage points at the basic and higher rates from 6 April 2026, so the advantage over salary is smaller than it was.
- A one-person company usually cannot claim the Employment Allowance, so employer's National Insurance is due on salary above £5,000.
Rates are for the 2026 to 2027 tax year (6 April 2026 to 5 April 2027). The example uses Corporation Tax at the 19% small profits rate.
Most directors of small limited companies pay themselves through a combination of a modest salary and dividends. The mix matters because each is taxed differently, and the right balance depends on the company’s profit, your other income and who else is on the payroll.
Salary
A salary is paid through the company’s payroll, with Income Tax and National Insurance worked out under PAYE. It is a business expense, so it reduces the company’s taxable profit.
The thresholds that matter most for a director’s salary in 2026 to 2027 are:
| Threshold | Annual amount | What happens at this point |
|---|---|---|
| Secondary threshold | £5,000 | The company starts paying employer’s National Insurance at 15% |
| Lower earnings limit | £6,708 | The year can count towards your State Pension record |
| Primary threshold | £12,570 | You start paying employee’s National Insurance at 8% |
| Personal Allowance | £12,570 | You start paying Income Tax |
The Employment Allowance, worth up to £10,500 a year, reduces the company’s employer’s National Insurance bill. A company cannot claim it if the director is the only employee paid above £5,000, so a one-person company usually pays employer’s National Insurance on any salary above that level.
Dividends
Dividends are paid to shareholders out of profit after Corporation Tax. They are not a business expense, and no National Insurance is due on them. The company can only pay a dividend out of profit it has actually made and not already paid out, and each dividend should be supported by board paperwork.
The first £500 of dividends each year is covered by the dividend allowance. Above that, dividends are taxed according to which Income Tax band they fall in:
| Income Tax band | Tax rate on dividends |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
These rates rose by two percentage points at the basic and higher rates from 6 April 2026, so the advantage of dividends over salary is smaller than it was.
An example
A company in England makes £50,000 of profit in 2026 to 2027 before paying its director, who is the only employee and has no other income. The director takes a salary of £12,570 and the rest as dividends.
- The salary is covered by the Personal Allowance, and no employee’s National Insurance is due.
- The company cannot claim the Employment Allowance, so it pays employer’s National Insurance of £1,135.50, which is 15% of the £7,570 of salary above £5,000.
- That leaves profit of £36,294.50. Corporation Tax at 19% is £6,896, leaving £29,399 to pay as a dividend.
- The first £500 of the dividend is covered by the dividend allowance. The remaining £28,899 falls within the basic rate band and is taxed at 10.75%, which is £3,107.
- The director keeps £38,862: £12,570 salary plus £29,399 dividend, less £3,107 tax.
For comparison, if the same company paid the whole £50,000 out as salary, the director would keep about £35,300, because employer’s National Insurance at 15% and employee’s National Insurance at 8% cost more than the Corporation Tax saved.
This is an illustration, not a recommendation. A lower salary can make more sense for some one-person companies, and Scottish taxpayers have different Income Tax bands on salary.
Other points to consider
- Company pension contributions. Payments made by the company into your pension are another way to take value out, and are usually an allowable expense for the company, and so reduce the corporation tax bill.
- Director’s loan account. Taking money that is not salary, dividend or a repaid expense creates a loan from the company, which has its own tax consequences if it is not repaid in time.
- Timing. Dividends are taxed in the tax year they are paid, which can affect which band they fall into.
How we can help
We agree a pay plan with you at the start of each tax year, review it when profits change, and run the payroll and dividend paperwork so it is done correctly. If you would like us to look at your position, please get in touch.
Sources
This guide is general information, not personal advice. Rules change, so check the last-reviewed date. If you would like to talk through how it applies to you, we are happy to help.
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