One of the first questions we get from new limited company directors is: how should I actually pay myself? The salary vs dividends question is central to getting your take-home pay right, and making the wrong call can cost you more in tax than it needs to.

The short answer is that for most sole directors in 2026/27, a modest salary topped up with dividends remains the most tax-efficient approach. Dividends are taxed at lower rates than employment income, and keeping your salary at or near the personal allowance of £12,570 means you take home more of what your company earns.

But the detail matters. The right split depends on how much your company makes, whether it pays corporation tax at 19% or 25%, and whether you have other sources of income. This post walks through the logic so you can see where you stand.

Salary is treated as employment income. It attracts income tax and, above certain thresholds, National Insurance from both you (as the employee) and your company (as the employer). Salary is also a deductible business expense, which means it reduces the company’s taxable profit and therefore its corporation tax bill.

Dividends are paid from after-tax profits. The company pays corporation tax first, then distributes what is left. You pay dividend tax on what you receive, but there is no National Insurance on dividends at all, and dividend tax rates are considerably lower than income tax rates on employment income.

For 2026/27, dividend tax rates are 8.75% at basic rate, 33.75% at higher rate, and 39.35% at additional rate. Compare those to income tax rates of 20%, 40%, and 45% respectively, and you can see why dividends are attractive once you are past the personal allowance.

The £500 dividend allowance means the first £500 of dividends you receive each year is tax-free, regardless of which tax band you are in. It is a modest allowance, but it is worth using.

The critical point is that these two income types interact. You cannot look at dividends in isolation without understanding what salary you are already drawing, and what that means for your overall tax position.

For most sole directors with no other employees, the sweet spot on salary sits at or near the personal allowance of £12,570 for 2026/27. Here is why.

Employee National Insurance on salary below £12,570 stays at 0%. You only start paying employee NI once your earnings exceed roughly £242 per week (£12,570 per year). So a salary at exactly £12,570 generates no employee NI at all.

Employer NI is a different matter. At a salary of £12,570, your company will pay roughly £1,137 in employer National Insurance. That sounds like a cost, but it is deductible for corporation tax purposes. At the main corporation tax rate of 25%, that deductibility reduces the net cost to approximately £853 per year.

One thing to be aware of: if you are the sole director with no other employees, the employment allowance (which can offset up to £5,000 of employer NI) is not available to you. That allowance only applies where there is at least one other employee who is not a director.

A salary at £12,570 also uses your full personal allowance, meaning that £12,570 of income is received entirely tax-free. Anything on top of that, taken as dividends, is then taxed at the lower dividend rates rather than income tax rates. That combination is what makes the salary-plus-dividends structure so effective for most directors.

A worked example helps make this concrete. Suppose you pay yourself a salary of £12,570 and then take a further £25,000 as dividends in 2026/27.

After the £500 dividend allowance, you have £24,500 of taxable dividends. At the basic rate of 8.75%, the dividend tax comes to roughly £2,144. Add in the employer NI of approximately £1,137 (netted down to around £853 after corporation tax relief at 25%), and the total tax cost on that £25,000 of dividends is comfortably below £3,000.

If you had taken that same £25,000 as additional salary instead, you would pay 20% income tax above the personal allowance and 8% employee NI between the primary threshold and the upper earnings limit. The personal tax alone on £25,000 of additional salary would run to roughly £6,750. That is a difference of around £4,000 in favour of the dividend route on the same amount of income.

The saving narrows if your company pays the small profits rate of 19% rather than 25%, because the salary deduction against corporation tax is worth less. But the direction of travel is the same: dividends are still the more efficient option once you have used the personal allowance via salary.

These figures assume you have no other income sources. If you have employment elsewhere, rental income, or other taxable earnings, your tax position changes and the optimal split will be different.

The salary-at-£12,570-plus-dividends approach works well for most sole directors, but there are situations where a different approach makes more sense.

If you want to protect State Pension entitlement with minimal NI cost

You need at least one qualifying year of National Insurance contributions to build your State Pension. A salary at the lower earnings limit, currently around £6,708 per year, earns you a qualifying year with no NI actually due. Some directors prefer this route to keep employer NI costs at zero. The trade-off is that you are using less of your personal allowance via salary, which means more dividend income falls within the taxable band.

If your company pays 25% corporation tax

At the main corporation tax rate, there is an argument for taking a higher salary. Each pound of salary saves 25p in corporation tax, and if you pay only 20% income tax on it above the personal allowance, you are 5p per pound better off versus taking it as retained profit. Whether that arithmetic justifies the extra NI depends on your specific numbers, but it is worth modelling.

If you have other income

Other income pushes you up through the tax bands faster. If you already have salary from an employer, rental income, or significant savings interest, your dividends may be taxed at the higher rate of 33.75% rather than the basic rate. At that point, the dividend advantage over salary narrows considerably, and the optimal split requires a proper look at your full personal tax position.

Dividend paperwork is not optional. To pay yourself dividends lawfully, your company must have sufficient retained profits after corporation tax, and you need to document each dividend payment with board minutes and a dividend voucher. Paying dividends out of profits that do not exist is treated as an illegal distribution and creates problems you do not want.

Timing matters more than people realise. Dividends are taxed in the year you receive them. Taking a large dividend in March rather than April might push you into a higher tax band for one year rather than spreading the income across two. A small amount of forward planning on timing can make a meaningful difference.

Pension contributions are worth considering alongside the salary and dividend decision. Company pension contributions are a corporation tax deductible expense and do not attract National Insurance. For directors who are thinking about their longer-term position, routing some of the company’s profits into a pension can be more efficient than taking everything as dividends, depending on your age and retirement plans.

Finally, if you are associated with other limited companies (for example, a spouse who also has a company, or other connected businesses), the corporation tax thresholds are divided between them. That can mean a company hits the 25% main rate at a lower profit level than you might expect, which shifts the optimal salary calculation. If that applies to you, it is worth getting specific advice rather than using a standard rule of thumb.