Salary vs Dividends 2026/27

Many owner-managed companies use a combination of salary and dividends to pay directors. Salary can create PAYE and National Insurance obligations, but it may also reduce company profits for Corporation Tax purposes. Dividends do not attract National Insurance, but they are paid from post-tax profits and must be supported by distributable reserves.

For 2026/27, the planning position needs particular care because dividend tax rates have increased for basic-rate and higher-rate taxpayers, while the dividend allowance remains modest at £500. At the same time, employer National Insurance remains a key factor for companies deciding how much salary to pay directors.

This guide explains the practical difference between salary and dividends, the key 2026/27 tax figures, common director payment strategies and when to ask an accountant to calculate the most suitable approach for your company.

Salary vs dividends: the basic difference

A salary is employment income paid through the company payroll. It is reported to HMRC through PAYE, and it may create Income Tax, employee National Insurance and employer National Insurance. Salary is usually treated as an allowable business expense for Corporation Tax, provided it is incurred wholly and exclusively for the business.

A dividend is a distribution of company profit to shareholders. Dividends are not paid through payroll and do not attract National Insurance, but they can only be paid from profits available for distribution after Corporation Tax. Directors must ensure dividends are properly approved, documented and supported by company reserves.

Key 2026/27 tax figures for directors

These are the headline rates and thresholds most relevant to UK limited company directors for salary and dividend planning.

Why directors often use a low salary and dividends

Many small company directors historically used a relatively low salary and then extracted additional profits as dividends. The reason is that dividends do not attract National Insurance, while a salary may create employee and employer National Insurance.

However, the best answer is not always “take the lowest possible salary”. The right salary level depends on several factors, including whether the company has other employees, whether Employment Allowance is available, the director’s pension goals, available company profits and the director’s wider personal tax position.

For 2026/27, salary planning needs to consider the £5,000 employer National Insurance secondary threshold, the £12,570 employee primary threshold and the 15% employer National Insurance rate. A salary above the secondary threshold may still be tax-efficient in some cases because salary can reduce Corporation Tax, but the calculation needs to be done properly.

When salary can be useful

Salary is not only about immediate tax. It can support wider director and company planning.

• It can reduce taxable company profits where it is an allowable business expense.
• It can help maintain a National Insurance record if paid at an appropriate level.
• It can support mortgage, finance or income-verification requirements.
• It can help justify pension contributions and wider remuneration planning.
• It creates regular, predictable income for the director.
• It may be appropriate where the director performs significant duties for the company.

Salary must be processed correctly through payroll. That means using PAYE, submitting Real Time Information reports and keeping payroll records. Accusolve can support this through Payroll & PAYE UK and Payroll Services.

When dividends can be useful

Dividends can be a flexible way to extract company profits, especially for owner-managed companies with sufficient retained profit. Because dividends do not attract National Insurance, they remain an important part of director remuneration planning.

• Dividends do not attract employee or employer National Insurance.
• They can be paid after Corporation Tax where the company has distributable reserves.
• They can be timed around company cash flow and personal tax planning.
• They can allow shareholders to receive profits in proportion to shareholdings.
• They can be combined with a salary for a balanced extraction strategy.

Dividends must be properly documented. The company should prepare dividend vouchers, keep board minutes and ensure the dividend is lawful. If dividends are paid when the company has insufficient distributable reserves, they may be unlawful and may need to be reclassified, often creating director’s loan account issues.

Salary and dividends compared for Corporation Tax

Salary can reduce company profits before Corporation Tax, but dividends cannot. This is one of the main reasons the salary-versus-dividend calculation is more complex than simply comparing Income Tax and National Insurance.

For example, if a company pays an additional salary, the salary cost and any employer National Insurance may reduce taxable profits. If the company instead pays a dividend, the dividend is paid from profit after Corporation Tax.

The Corporation Tax saving on salary depends on the company’s profit level and effective Corporation Tax rate. Companies with profits below £50,000 may be within the 19% small profits rate, while companies above £250,000 may be within the 25% main rate. Companies between those levels may be affected by marginal relief.

This is why a director salary strategy should usually be reviewed alongside Corporation Tax, CT600 Tax Return, Annual Accounts Filing and Management Accounts.

A simplified example

Assume a company director is deciding whether to take additional money as salary or dividends. A higher salary may create employer National Insurance for the company and employee National Insurance for the director. However, it may also reduce company taxable profits.

A dividend avoids National Insurance, but it is paid from profits after Corporation Tax and may be taxable at 10.75%, 35.75% or 39.35%, depending on the director’s tax band and available allowances.

The most efficient choice can change depending on:

• The company’s Corporation Tax rate or marginal relief position.
• Whether Employment Allowance is available.
• The director’s other income.
• Whether the director is in Scotland, where salary tax bands differ.
• Whether the director needs qualifying earnings for pension or lending purposes.
• Whether the company has enough distributable reserves for dividends.
• Whether a dividend would push the director into a higher tax band.

For most companies, the correct answer requires a tailored calculation rather than a fixed rule.

Do Scottish directors need a different calculation?

Yes. Scottish Income Tax rates apply to non-savings, non-dividend income such as salary. Dividend tax rates are UK-wide, but the way salary is taxed can differ for Scottish taxpayers.

This means a salary and dividend mix that works well for a director in England, Wales or Northern Ireland may not produce the same result for a Scottish taxpayer. Directors should check their tax residency position and the relevant income tax rules before deciding on a salary level.

What about directors with no other employees?

Single-director companies often need specific payroll planning because Employment Allowance may not be available where the only employee paid above the secondary threshold is also a director. This can change whether paying salary above certain levels is efficient.

Where the company has other employees, the calculation may be different. If Employment Allowance is available, the employer National Insurance cost may be reduced or eliminated up to the allowance limit, which can make a higher director salary more attractive in some cases.

Common salary and dividend mistakes

• Taking dividends without checking distributable reserves.
• Failing to prepare dividend vouchers and board minutes.
• Using dividends to replace salary where the director needs payroll income evidence.
• Ignoring employer National Insurance when setting salary.
• Forgetting that salary may reduce Corporation Tax but dividends do not.
• Allowing personal withdrawals to create an overdrawn director’s loan account.
• Not reviewing the position after changes to dividend tax rates or allowances.
• Using last year’s salary strategy without checking current rates and company profits.
• Failing to reconcile payroll, dividends and bookkeeping before accounts are prepared.

Practical director remuneration checklist

Before finalising your 2026/27 salary and dividend plan, review the following:

• What is the company’s expected profit before director remuneration?
• Will the company fall within the 19%, marginal relief or 25% Corporation Tax position?
• Is Employment Allowance available?
• What other income does the director have?
• Will dividends push the director into a higher tax band?
• Does the company have enough distributable reserves?
• Are dividends being approved and documented correctly?
• Is payroll being reported correctly through PAYE?
• Would employer pension contributions be more efficient than extra salary or dividends?
• Does the director need regular income evidence for mortgage or finance purposes?
• Are bookkeeping and director’s loan records up to date?

How Accusolve Accountants can help

Accusolve Accountants supports UK limited company directors, startups, owner-managed businesses and non-UK resident company directors with practical tax and accounting support. We are AAT AML supervised and we do not describe ourselves as chartered accountants.

We can help you:

• Compare salary and dividend extraction options for 2026/27.
• Review PAYE, National Insurance and Corporation Tax impact.
• Check whether dividends are supported by distributable reserves.
• Prepare dividend vouchers and supporting records.
• Set up and run payroll for directors and employees.
• Review director’s loan accounts and personal withdrawals.
• Prepare annual accounts and CT600 Corporation Tax returns.
• Use bookkeeping and management accounts to support better tax planning.

Salary and dividend planning should not be left until the accounts are due. Reviewing the position during the year gives you more options, improves cash-flow visibility and helps avoid unexpected tax bills.