Most new directors pay themselves the wrong way. Not because they’re trying to be clever, but because the rules changed in 2025 and again in April 2026, and most of the advice still online assumes the old numbers. Dividend tax went up. Employer NI went up. The Secondary Threshold dropped to £5,000. The “obvious” salary level isn’t obvious anymore. This guide walks through what’s actually optimal in 2026/27, with worked examples at three profit levels so you can see where you sit.
The mechanics in one paragraph
A salary is a deductible expense for your company, so it reduces Corporation Tax. Dividends are paid out of post-tax profit, so they don’t. Salary attracts PAYE Income Tax and Class 1 National Insurance: 8% employee NIC above the Primary Threshold (£12,570) and 15% employer NIC above the Secondary Threshold (£5,000). Dividends attract no NIC at all but are taxed personally at 10.75%, 35.75% or 39.35% from 6 April 2026, with a £500 Dividend Allowance on top. The art is choosing the mix.
Why a small salary is almost always worth taking
Three thresholds matter. The Lower Earnings Limit (£6,708 for 2026/27)is the floor for getting a qualifying year for the State Pension. Pay yourself at or above the LEL and the year counts towards the 35-year qualifying record, even at zero NIC. The Primary Threshold (£12,570) is where employee NIC starts, and it also happens to equal the Personal Allowance, so a salary up to this level is income-tax-free for you personally and pays zero employee NIC.
The third threshold is the Secondary Threshold (£5,000) – the level above which the company pays 15% employer NIC. Below £5,000 there’s no employer NIC, but you also fall below the LEL and lose the qualifying-year benefit if you go too low. The pragmatic floor for a director’s salary is the LEL, and the pragmatic question is how much above it to go.
The 2026/27 optimum salary decision
Two reasonable options for a single-director company. The first is a salary at the Lower Earnings Limit (£6,708): zero employee NIC and a qualifying year for the State Pension. The company picks up a small slice of employer NIC on the £1,708 between the Secondary Threshold (£5,000) and the LEL – roughly £256. The second option is a salary at the Personal Allowance (£12,570): the salary is bigger, so the company saves more Corporation Tax, but it also pays 15% employer NIC on the £7,570 between £5,000 and £12,570 – about £1,135.50 of employer NIC.
The arithmetic is straightforward. Each extra pound of salary above the ST saves you 19% (or up to 25% with marginal relief between £50,000 and £250,000 of profits)in Corporation Tax but costs 15% in employer NIC. So every extra £1 of salary above the ST saves between 4p and 10p once you net everything out – better than leaving the same pound as profit and paying it out as a dividend (10.75% basic, 35.75% higher) on top of the 19-25% Corporation Tax it’s already cost.
One twist matters more than it used to. If you have other employees and qualify for the Employment Allowance – £10,500 for 2026/27– the employer NIC drops to zero up to that £10,500 of total employer NIC, and the higher salary becomes clearly better. Single-director companies with no other employees on payroll cannot claim Employment Allowance. The bottom line for most single-director companies is a salary somewhere between £6,708 and £12,570; the exact figure depends on your other income and whether your spouse is a shareholder.
Dividend tax in 2026/27 – what changed
From 6 April 2026, the ordinary (basic) dividend rate rose from 8.75% to 10.75% and the upper (higher) rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. The Dividend Allowance is unchanged at £500. That’s a 2-percentage-point rise on the rates that hit most director-shareholders, and it shifts the salary-vs-dividend arithmetic enough to be worth re-running.
Dividends fall in whichever Income Tax band the rest of your income places you in: they’re taxed last (after salary, after the Personal Allowance, after savings income). The Dividend Allowance applies on the first £500 of dividends in whichever band they would have fallen, so it “costs” band space at that level. None of this changed in April 2026 – only the rates above the allowance moved.
One practical implication that’s easy to overlook: the new rates apply to dividends paid (not declared) on or after 6 April 2026. If your company has a March year-end and you were planning a year-end dividend, the timing of the actual payment into your bank account is what determines which rate applies – not the date of the board minute. Plenty of directors moved year-end dividends forward into the 2025/26 tax year for exactly this reason; the same window won’t come round again, but the principle (timing the dividend in the right tax year) remains a useful lever every year. If you have unused basic-rate band one year and project a higher-rate year next, pulling a dividend forward into the lower-rate year saves real money even at unchanged rates.
Worked example – £30,000 of profit (after CT)
Assumptions: single director, no other personal income, no spouse shareholder, England (English bands), no Employment Allowance available. Company pays a £6,708 salary plus £30,000 of dividends. Total drawings £36,708.
The Personal Allowance covers £12,570 of total income. The salary uses £6,708 of it, leaving £5,862 of PA available against the dividends. The Dividend Allowance covers the next £500 of dividends. The remaining £23,638 of dividends (£30,000 − £5,862 − £500) all sit in the basic-rate band and are taxed at 10.75% – a dividend tax bill of £2,541.
Take-home: £36,708 minus £2,541 equals £34,167. The company’s view: it deducted the £6,708 salary against Corporation Tax and paid the £30,000 dividend out of post-tax profit. (See the calculation block at the top of this article’s source code for the audit trail.)
Worked example – £60,000 of profit (after CT)
Same assumptions, but the company pays a £6,708 salary and £60,000 of dividends. Total drawings £66,708. Now the dividends straddle the basic and higher rate bands, and the calculation gets more interesting.
The Personal Allowance and Dividend Allowance behave the same way as in the £30k example: £5,862 of PA covers the first slice of dividends, the £500 DA covers the next slice. The basic-rate band runs to £50,270, so the basic-rate capacity left after the salary, the PA-covered dividends and the DA-covered dividends is £37,200. That £37,200 of dividends is taxed at 10.75% – £3,999.
What’s left of the dividends (£60,000 − £5,862 − £500 − £37,200 = £16,438) sits in the higher-rate band and is taxed at 35.75% – £5,877. Total dividend tax £9,876. Take-home £56,832. The jump in marginal rate from 10.75% to 35.75% is the cliff-edge that’s easy to miss in a year-end dividend decision.
Worked example – £100,000 of profit (after CT)
Same assumptions, but the company pays a £6,708 salary and £100,000 of dividends. Total drawings £106,708 – and now the £100,000 Personal Allowance taper kicks in. Adjusted net income above £100,000 reduces the PA by £1 for every £2; at £106,708 of total income the PA is reduced by £3,354 to £9,216.
The salary uses £6,708 of the (reduced) PA, leaving £2,508 of PA available against dividends. The DA still covers £500. The basic-rate band capacity remaining for further income is £50,270 − £6,708 − £2,508 − £500 = £40,554. That £40,554 of dividends is taxed at 10.75% – about £4,360. The remaining £56,438 of dividends (£100,000 − £2,508 − £500 − £40,554) sits in the higher-rate band and is taxed at 35.75% – about £20,177. Total dividend tax around £24,537; take-home around £82,171.
The PA taper roughly doubles the effective marginal rate on the slice of dividends that lies between £100,000 and £125,140. This is where pension contributions or other structural moves become much more attractive than just paying yourself larger dividends.
Pension contributions – the often-missed lever
Your company can contribute up to £60,000 a year – the Annual Allowance– into your pension as a deductible business expense, reducing Corporation Tax. The Tapered Annual Allowance kicks in when adjusted income goes above £260,000 and threshold income above £200,000, reducing the AA by £1 for every £2 down to a £10,000 floor. The Money Purchase Annual Allowance (£10,000) applies once you’ve started flexibly drawing from a pension.
Compare the lever. Paying yourself an extra £10,000 of higher-rate dividends costs the company nothing in Corporation Tax (the dividend is post-tax) but costs you £3,575 in personal dividend tax (35.75%). Paying the same £10,000 into your pension as an employer contribution saves the company £1,900 in Corporation Tax (at 19%) and costs you £0 in personal tax until you draw it. The trade-off is that the money is locked away until age 55 (rising to 57 from April 2028). For director-shareholders with a long horizon, the maths is usually clear.
A few practical points if you’re going to use the lever seriously. First: pension contributions made by a company are employer contributions (not personal), which means they’re not capped by your relevant UK earnings the way personal contributions are. The cap that does apply is the Annual Allowance (and any unused allowance carried forward from the previous three tax years, provided you were a member of a registered pension scheme in those years). Second: the company’s contribution must be “wholly and exclusively for the purposes of the trade” to be deductible against Corporation Tax; HMRC have challenged director pension contributions where they were disproportionately large compared to the director’s remuneration package, especially where the director is also a family member of the controlling shareholder rather than the shareholder themselves.
Third, on the Money Purchase Annual Allowance: if you’ve already started drawing flexibly from a pension (most commonly, you’ve taken some of the 25% tax-free lump sum and any taxable income), the MPAA replaces the £60,000 Annual Allowance with a £10,000 limit on future contributions. That includes employer contributions through the company. Drawing even a small flexible payment is a one-way door – worth knowing about before you trigger it.
When salary should be higher than the optimum
Four common situations push the “textbook” salary higher. First: you have other employees and qualify for the Employment Allowance, which removes the employer-NIC drag and makes the £12,570 Personal Allowance salary clearly the better answer. Second: you have no other personal income and want to make personal pension contributions based on relevant UK earnings – personal (not employer) pension contributions are capped at the higher of £3,600 and your relevant UK earnings, so taking a £12,570 salary opens up that level of personal contribution capacity each year, on top of whatever the company contributes.
Third: you’re seeking a mortgage. Most mainstream lenders score a director’s “income” from PAYE earnings on the P60 plus a multiple of dividends from the self-assessment return; specialist contractor lenders use day-rate or net-profit views, but the menu is narrower and the pricing is worse. If you’re inside a 12-month buying window, paying a higher salary the year before completion often unlocks a meaningfully better mortgage offer – an avoidable few hundred pounds of extra NIC can be worth thousands in interest saved.
Fourth: your spouse is a shareholder. The Settlements legislation broadly accepts dividends paid to a spouse who holds ordinary shares with full economic and voting rights; done sensibly, it shifts dividend income from a higher-rate payer to a basic-rate payer and uses the second person’s Personal Allowance and basic-rate band that would otherwise be wasted. Where this works, stretching your salary higher is usually inferior to expanding the dividend slice paid to the other shareholder. Get specific advice if dividend amounts to the spouse are substantial relative to their involvement in the business; HMRC look at this category more carefully than most.
Frequently asked questions
The questions directors ask most often when they’re working out how to pay themselves.
Why pay any salary at all if dividends are tax-efficient?
A salary up to £6,708 secures a qualifying year for State Pension and costs zero NIC. Above that, salary becomes Corporation Tax-deductible (saving 19-25% in CT) at the cost of 15% employer NIC, which usually still nets out positive. Pure dividends mean no qualifying year, no salary deduction, and a higher overall tax bill.
Did dividend tax really go up in April 2026?
Yes. From 6 April 2026, the ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. The Dividend Allowance is unchanged at £500. This was announced in Budget 2025.
Can I declare a dividend whenever I like?
Only out of distributable profits (post-tax retained earnings) and only when the company can afford to pay it. Directors must produce a board minute and a dividend voucher for each declaration. Declaring a dividend the company can't afford is “unlawful” and HMRC may treat it as a director's loan instead.
My spouse is a shareholder. Can I shift income to them to save tax?
If your spouse genuinely owns shares with full economic and voting rights and isn't being paid for sham work, dividends paid to them are taxed in their hands at their tax rates. This is widely used. The “Settlements legislation” and the Arctic Systems case set the limits – speak to an accountant if dividend amounts are large or your spouse provides little involvement in the company.
I work alone in my company. Can I claim Employment Allowance?
No. Single-director companies with no other employees are excluded from Employment Allowance, regardless of profit level. The £10,500 only applies if you have at least one other employee whose salary is above the Secondary Threshold (£5,000).
Should I pay myself monthly through PAYE or annually?
Annual is fine and saves payroll work, provided the salary is paid (not just declared) before the tax year end. Most accountants suggest a monthly payroll for the optics of being a “real” employer (mortgage applications, etc.), but legally a single annual payment in March works.
Can I pay my children dividends?
Only if they're shareholders, and there are anti-avoidance rules about minor children that catch most of this. In practice, it rarely works as a tax planning tool. Adult children can be shareholders without issue, but their dividends are taxed in their hands.
Is there a salary level above which dividends are pointless?
At very high incomes (above the £125,140 Personal Allowance taper), the marginal tax rate on additional salary is around 60% (40% income tax + 2% employee NIC + 15% employer NIC ≈ 51% effective once you account for the CT relief and PA taper). Dividends at the additional rate (39.35%) are cheaper. But by that level you should be looking at pension contributions and other strategies, not arguing about salary vs dividend mix.
