Directors’ Salary vs Dividends

If you run your own limited company, how you pay yourself has a direct effect on how much tax you and the company pay overall. Most directors take a mix of a small salary and dividends rather than one or the other, because the two are taxed in very different ways. This guide walks through why, with a full worked example using 2026/27 rates.

Salary: taxed like any other employee

A director’s salary is treated exactly like any other employee’s pay. It’s subject to Income Tax and employee National Insurance once it goes above certain thresholds, and it’s a tax-deductible expense for the company. The company also pays employer National Insurance on top of it.

For 2026/27, employer National Insurance is charged at 15% on salary above £5,000 a year. Most one-person companies don’t qualify for the Employment Allowance, which would otherwise cover up to £10,500 of employer NI, because HMRC excludes a company where the director is the only employee paid above that threshold. That makes the employer NI cost unavoidable for most small, owner-managed companies.

Dividends: taxed differently, and only from profit

Dividends come out of profit that’s already had Corporation Tax charged on it – currently 19% on profits up to £50,000, rising on a sliding scale to 25% on profits above £250,000. Once that profit reaches you personally as a dividend, it’s taxed again, but without any National Insurance. Rates rose by 2 percentage points from 6 April 2026 following the Autumn 2025 Budget, and currently stand at:

the first £500 is tax-free (the dividend allowance)
10.75% within the basic rate band
35.75% within the higher rate band
39.35% on income above £125,140

Dividends can only legally be paid out of retained, distributable profit. If the company doesn’t have enough profit after tax and other liabilities, a dividend can be treated as illegal and may need to be repaid, so it’s worth checking the numbers before declaring one. Each dividend also needs a board minute and a dividend voucher, even in a one-person company.

A worked example for 2026/27

Say your company has £50,000 of profit for the year available to extract, you’re a sole director with no other income and no other employees, and none of the profit needs to stay in the business. Here’s how three approaches compare:

All salary: pay yourself £44,130 in salary – the most the company can afford once £5,870 of employer NI is added on top of the £50,000 pot. After Income Tax and employee NI, you keep £35,294: a total tax and NI cost of 29.4% of the original profit.
All dividend: the company pays Corporation Tax of £9,500 on the £50,000 profit, then you draw the remaining £40,500 as a dividend. After dividend tax, you keep £37,551: a total cost of 24.9%.
Small salary plus dividend (the usual approach): pay yourself a salary of £12,570, costing £1,136 in employer NI, then draw the rest of the profit as a dividend after Corporation Tax. You keep £38,862: a total cost of 22.3%, and around £3,568 more in your pocket than taking a salary alone.

The salary-plus-dividend approach wins here for two reasons. The £12,570 salary is a Corporation Tax-deductible cost even after employer NI, and it uses up your tax-free personal allowance before any dividend tax applies. It also keeps you above the Lower Earnings Limit (£6,708 for 2026/27), so the year still counts towards your State Pension – which a dividend-only strategy wouldn’t do, since dividends don’t count as earnings for National Insurance purposes at all.

These figures are based on confirmed 2026/27 rates and assume no other income for the year. They’re a general illustration rather than personalised advice – your own numbers will depend on your company’s profit, your other income, and how much needs to stay in the business.

Why the right balance is different for everyone

The £12,570 salary figure above assumes no other income and no Employment Allowance. The right number for you can change if:

you have other employees or a second director, which can unlock the Employment Allowance and reduce or remove the employer NI cost of a higher salary
you have income from elsewhere – another job, rental income, a pension – that already uses up some or all of your personal allowance
your total income is close to £50,270 or £125,140, where extra dividends get taxed at 35.75% or 39.35% instead of 10.75%
the company needs to retain profit for working capital, tax bills, or planned investment, rather than distributing all of it

This is why the same “small salary plus dividends” advice can lead to quite different numbers from one company to the next.

If you’d like help working out the right salary and dividend split for your own company, get in touch – or take a look at how we support limited companies.

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John is the founder of Summed Up Accountancy Services. He qualified as a Chartered Certified Accountant (ACCA) in 2006, worked in practice and then in industry as a Head of Finance, and set up Summed Up in 2019 to give growing businesses and directors straightforward, jargon-free advice.