Director pay and dividends guide

Why salary and dividends?

A limited company director typically pays themselves a combination of a small salary and dividends drawn from after-tax company profit. Done correctly, this splits your income across two tax bases (employment income and dividend income), each with their own allowances and rate bands, so the combined tax charge is lower than a pure salary of the same amount.

The optimal salary in 2026/27

Most single-director companies set salary at one of two levels:

• £5,000 (secondary threshold). No employer National Insurance is due below this level, so there is no NIC cost at all. The salary does not use your personal allowance, but it qualifies as a deductible expense against company profit.
• £12,570 (personal allowance). Uses the full personal allowance so no income tax is due on the salary. Employer NIC is payable on the slice above £5,000 (at 15%), costing £1,135.50, but the company deducts both the salary and the NIC from taxable profit, reducing corporation tax. With one director and no other employees you cannot claim the £10,500 Employment Allowance, so this level makes sense only when the NIC cost is more than offset by the CT saving and the higher personal allowance shelter for dividends. At a £80,000 profit level the modeller shows £12,570 is marginally better. At lower profits £5,000 can win.

The Excel model lets you switch between salary levels and see the result live.

How dividends are taxed in 2026/27

Dividends are paid from company profit after corporation tax. From 6 April 2026 the rates are:

• Dividend allowance: £500 (down from £1,000 in 2023/24 and £2,000 before that).
• Basic rate band (to £50,270 total income): 10.75%
• Higher rate band (£50,271 to £125,140): 35.75%
• Additional rate (above £125,140): 39.35%

Dividends sit on top of salary in the tax calculation. At a salary of £12,570 your basic-rate band runs from £12,570 to £50,270, so a dividend of up to £37,700 falls entirely in the basic rate, paying 10.75% after the £500 allowance.

Corporation tax on the company profit

The company pays corporation tax before distributing dividends. In 2026/27:

• Small profits rate (19%) applies to profits up to £50,000.
• Main rate (25%) applies to profits above £250,000.
• A marginal rate (effectively 26.5% on the slice) applies between £50,000 and £250,000.

At £80,000 profit before salary, after paying a £12,570 salary and £1,135.50 employer NIC, the taxable company profit is £66,294.50. Corporation tax is approximately £13,818.

Worked example at £80,000 profit

Item	Amount
Company profit before salary	£80,000
Director salary	£12,570
Employer NIC	£1,136
Taxable company profit	£66,294
Corporation tax (approx.)	£13,818
Distributable profit (dividends)	£52,476
Dividend tax (approx.)	£9,157
Net cash in your pocket	£55,890
Total tax and NIC	£24,110

Employment Allowance

The Employment Allowance offsets up to £10,500 of employer NIC in 2026/27. However, a company where the sole director is also the only employee on the payroll does not qualify. You need at least one other genuine employee. If you hire a member of staff, the optimal salary rises to £12,570 because the NIC on the director's salary is now covered by the allowance.

When to review your structure

Your salary and dividend mix should be revisited when: your profit changes significantly; you hire your first employee; your personal income from other sources changes; dividend rates or corporation tax rates change (the 2026/27 dividend rate rise is the most recent example). The model is a starting point; a specialist confirms the right numbers for your situation before implementation.