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A director-owner of a company (limited), there are two ways to take payment from the company: dividends if your company is making profits, and salary through PAYE. It is crucial to find the right mix of these two components because there is a tax on a director’s salary. There is also a corporate dividend tax. The mix also impacts your National Insurance Contributions (NIC), state pension entitlements and benefits, employer’s NIC, etc.
That is why you must understand how to pay yourself dividends and a salary. You must have a strategy to structure the salary and dividends. This blog throws insights into these strategies and how to stay on top of the annual changes to tax thresholds on your salary and allowances.
Thresholds For The Most Tax Efficient Salary UK 2026/27
Before embarking on strategies, it is crucial to have the information on the thresholds for 2026-27.
A. Personal Allowance
- An annual personal allowance of £12,570 applies. This means no tax up to this earned amount.
- If your income is > £100,000, the personal allowance is reduced by> £1 for each > £2 earned above this amount.
- If your income = > £125,140, your personal allowance is zero.
B. Director Salary Tax Rates
Under the UK’s PAYE system, the income tax rates for directors and employees remain the same. The following income tax is applicable over and above the personal allowance to directors (these rates are applicable in Wales, England, and Northern Ireland) –
| Band | Tax Rate | Income |
| Basic Rate | 20% | £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional Rate | 45% | Above £125,140 |
In Scotland, the applicable
Tax on an executive director’s salary is as follows –
| Band | Tax Rate | Income |
| Started | 19% | Up to £16,537 |
| Basic | 20% | £16,537 – £29,526 |
| Intermediate | 21% | £29,527 – £43,662 |
| Higher | 42% | £43,663 – £75,000 |
| Advanced | 45% | £75,001 – £125,140 |
| Top | 48% | Above £125,140 |
C. Dividend Allowance
- Allowance on dividends for directors is £500 for 2025/26 and 2026/27. This means that the earnings from dividends up to £500 attract no tax.
- Above this allowance amount, director dividend tax is as per the table below –
| 2025/26 | 2026/27 | |
| Basic band | 8.75% | 10.75% |
| Higher band | 33.75% | 35.75% |
| Additional band | 39.35% | 39.35% |
D. NIC Thresholds
The same rates apply across the country. In 2026/27, the NIC threshold for your salary as a director includes –
- 8% on salary between £12,570 – £50,270. This is Class 1 (Primary) NIC
- 2% above £50,270.
The company additionally pays 15% Class 1 NIC as an employer (secondary) on salaries exceeding £5,000.
E. Corporation Tax
When a company pays salaries to its directors, the same can be accounted for as an expense for the business. Accordingly, the salary is subtracted from profits for corporation tax calculations. This is a key difference between drawing a salary as a director and taking dividends from the company’s profits.
Directors Dividend Tax Rate
When you receive dividends that the company pays from its profits, you are required to pay taxes. The dividend tax rates 26/27 are as follows –
| Earnings | Dividend Rate % |
| Up to £500 | 0 |
| £500 – £50,270 | 10.75 |
| £50,271 – £125,140 | 35.75 |
| £125,141 onwards | 39.35 |
Comparison: Company Director’s Salary Versus Dividends
This salary versus dividends comparison highlights the pros and cons of both components.
A. Salary through PAYE
| Pros | Cons |
| Predictable incomeHelps reduce the Corporation Tax for the companyCan be used for financing purposes, as banks and certain funders prefer salary for IR35Helps access State Pension and other benefits with NIC qualifying years | Income tax is applicable above the Personal Allowance thresholdEmployee and Employer NIC appliesAA higher salary reduces profits for dividend payoutWith an employer NIC, the cost to the business is higher vis-à-vis dividends |
B. Dividends
| Pros | Cons |
| Not subject to National Insurance ContributionsCompared to Income tax & NIC rates, dividend tax rates are mostly lowerPayout happens in case of profits only (flexible timing)Good source of income without adding to payroll costs | Can be paid only after paying Corporation TaxTaxable profits of the company are not reduced, as these are non-deductibleReduces NIC qualifying years for lower salaries |
Note – Besides paying yourself dividends and salary, you can also choose pension contributions or reimburse expenses as other means of earning from the company tax-efficiently.
Strategies For The Most Tax-Efficient Director’s Salary 2026/27 & Dividends
1. Choose the right salary
If you are keen to take home only salary instead of a mix of salary and dividends, this is the best option.
If you want to save taxes, the best salary in 2026-27 is either of the following –
- £5,000 – This is the annual Secondary Threshold of NIC and the point where employers need to pay employer NICs. At this point, there’s no income tax, employee, or employer NICs.
- £6,708 – This is the annual Lower Earnings Limit of NIC. At this point, no income tax or employee Class NIC applies. 15% employer NICs will apply on £1,708 (difference between £5,000 and £6,708)
- £12,570 – This is the standard annual Personal Allowance and Primary Threshold of NIC. At this point, Class NICs apply, but there is no income tax. Employer’s NICs apply on the amount £7,570 (difference between £5,000 and £12,750)
These three salary points are chosen as per the NIC Class 1 thresholds and the Personal Allowance
2. A mix of salary & dividends to optimise income for 2026/27
The hybrid strategy works best for most directors and owners of limited companies because
- You can take a salary at the NIC Primary Threshold point or near it. This helps build NIC qualifying years while you do not pay a significant employee NIC.
- With your salary around £5,000, £6,500, or £12,570 (as discussed above), you can then take dividends from the profits. This helps you take advantage of lower taxes while avoiding NICs
Using a tax calculator for directors to understand how the salary and dividend components impact your remuneration in 2026/27.
Tips To Optimise Salary Vs Dividends
- Understand the post-tax profits of your company
- Choose the right salary to make it the most tax-efficient. The best is to choose between £5,000, £6,500 or £12,570
- Once the salary is finalised, ensure the salary is operated via PAYE. You need to file RTI and you are treated as an employee of the company.
- Review other sources of income as a director
- If you’re unsure which approach is right for your business, Cangaf Accountants can review your circumstances and recommend the most tax-efficient salary and dividend strategy
- Keep reviewing the strategies annually and make changes if required.
Avoid These Mistakes While Strategising For Directors’ Salary in the UK
- Prefer a salary dividend mix instead of taking home a higher salary.
- Don’t pay dividends to yourself in case the company is not earning any profits.
- Compute your salary in a way that it remains below the NICs secondary threshold.
- Don’t neglect salary totally. You may lose NIC qualifying years and benefits.
- Since the dividend allowance is £500, do not ignore dividend tax.
- Do not forget to account for other income sources that you might have
Summarising
As a director of a limited company, it is the right time to work out your remuneration strategy for 2026/27. You need to find the perfect balance between dividend and salary. This way, you can save your taxes significantly.
Every director’s story is different and your saving strategy may have to be slightly different than the textbook. If you need experts to look into your specific situation to know what is the best as company director salary UK, contact our team today.
FAQs
1. Can a director take dividends if not a shareholder?
No. Only shareholders can be paid dividends. As a director if you are not a shareholder, you cannot be paid dividends.
2. What is director remuneration?
Director’s remuneration refers to the compensation that a director takes home from his company. It includes dividends, salary, pension contributions, bonuses, and other benefits
3. How often can you take dividends?
There is no limit on the number of times dividends can be taken in the UK. If the company is making profits, dividends can be paid out at numerous intervals.
4. While choosing dividend v salary, do NICs apply for dividends and salaries?
While NICs are applicable in the case of salaries, these do not apply for dividends. In the case of dividends, there’s only dividend tax.
5. What is the best salary proposition for 2026-27?
There are three salary points that wil work as the most tax-effcicient in 2026-27. These points are £5,000, £6,500, and £12,570. At these points, Income Tax and National Insurance liabilites are minimal.
6. Can my company pay dividends to its director even if it does not make profit? No. The company has to make profits to pay dividends to its shareholders. There could be penalties if a company does not follow this.
7. Do you pay NI on dividends?
No. You only pay Dividend Tax on dividends and not National Insurance (NI) contributions.
8. If my dividends exceeds the company’s profits, what happens?
If the amount is more than the post-tax profits, the excess will be treated as a director’s loan by HMRC.
9. Can the director’s salary be changed during the tax year?
Yes, it is possible. You will need to ensure the change is processed from the date the new salary gets into effect via payroll (RTI).
Further reading and official guidance
More guides and tools from our team:
- Salary vs dividend calculator
- UK dividend tax explained
- How much salary to take from your limited company
Official guidance from HMRC and GOV.UK:
