Many owner-directors pay themselves using a mixture of salary and dividends. The familiar question is simple: should a director take salary or dividends in 2026/27? The answer is more nuanced because company tax, personal tax, National Insurance, available profits and benefit entitlements all interact.
This guide explains the main rules for the 2026/27 tax year. It is designed for directors of UK owner-managed limited companies, but the most efficient approach depends on individual circumstances.
Salary vs dividends: the essential difference
A salary is employment income paid through payroll. It is normally deductible when calculating the company’s taxable profit, provided it is incurred wholly and exclusively for the business. PAYE Income Tax and National Insurance may apply.
A dividend is a distribution of profit to shareholders. It is paid after Corporation Tax and is not a deductible company expense. Dividends do not attract employee or employer National Insurance, but shareholders may pay dividend tax.
| Area | Salary | Dividend |
|---|---|---|
| Who can receive it? | Employees and directors | Shareholders |
| Company deduction | Usually deductible | Not deductible |
| PAYE payroll | Yes | No |
| National Insurance | Can apply | No |
| Profit required | Company needs cash | Sufficient distributable profit required |
| Paperwork | Payslip and payroll records | Board minute and dividend voucher |
Dividend tax rates for 2026/27
For dividends received between 6 April 2026 and 5 April 2027, the dividend tax rates are:
- 10.75% for dividends falling within the basic-rate band;
- 35.75% for dividends falling within the higher-rate band; and
- 39.35% for dividends falling within the additional-rate band.
The dividend allowance remains £500. This is a zero-rate band rather than an extra personal allowance: dividend income still counts when deciding the taxpayer’s band and can affect other tax calculations.
Your salary, dividends and other taxable income must be considered together. A director with rental income, employment income, savings or dividends from another company can reach a higher band sooner than expected.
Income Tax and National Insurance on salary
A director’s salary is subject to normal PAYE rules. For a taxpayer entitled to the standard Personal Allowance, the allowance is £12,570. It can be reduced when adjusted net income exceeds £100,000 and is unavailable in full in some circumstances.
Directors are employees for National Insurance. For 2026/27, employee National Insurance generally starts when annual earnings exceed £12,570. Employer National Insurance can begin at a much lower salary threshold, so a salary that creates no employee contribution may still cost the company employer contributions.
Director contributions are normally calculated using an annual earnings period. This prevents payment timing from producing unintended savings.
Why take any salary?
A salary can provide several advantages. It normally reduces company profit for Corporation Tax, provides regular evidence of earnings and can help build a qualifying National Insurance record when it reaches the relevant level.
Salary may also support certain contribution-based benefits and personal pension calculations. However, a very high salary can trigger PAYE and both employee and employer National Insurance, making it less efficient than a carefully balanced package.
Why use dividends?
Dividends do not attract National Insurance and can offer flexibility. A company can declare them when it has sufficient distributable reserves and the directors have reviewed up-to-date financial information.
They are not tax-free. Corporation Tax has already applied to the underlying company profit, and the shareholder may then pay dividend tax. From April 2026, the basic and higher dividend rates are two percentage points above their 2025/26 levels.
A dividend strategy also depends on share ownership. Dividends are normally paid according to the rights attached to each class of share. Directors should not move money between family members or create share arrangements solely on an assumption that the tax outcome will be accepted.
Corporation Tax must be included
The company pays Corporation Tax before dividends are available. The small profits rate is 19% for profits of £50,000 or less, while the main rate is 25% above £250,000. Marginal Relief creates a gradual transition between the two.
Those thresholds are reduced where companies are associated and are adjusted for short accounting periods. A salary can reduce taxable profit, but it also brings payroll and possible National Insurance costs. A proper comparison models the complete company-and-personal position rather than looking only at dividend rates.
Can every company pay dividends?
No. Dividends can only be paid from available distributable profits. A positive bank balance is not enough. Directors should review current accounts, brought-forward reserves, Corporation Tax and other liabilities before making a distribution.
If a payment described as a dividend was not lawful, it may need to be repaid or treated differently for tax and accounting purposes. This is particularly important when trading has weakened since the last annual accounts.
Salary, dividends and director’s loans are different
Company money belongs to the company. When a director withdraws funds without valid salary, dividend or expense treatment, the amount may be posted to the director’s loan account.
An overdrawn loan can create benefit-in-kind, reporting and company tax consequences. It should not be used as an informal substitute for payroll or dividend paperwork.
What is the most tax-efficient director salary?
There is no single salary figure that suits every company. The answer depends on whether the director has other employment, whether the company can claim Employment Allowance, how many employees it has, the director’s National Insurance record and the company’s profit level.
A company with only one employee who is also its sole director cannot generally claim Employment Allowance. By contrast, an eligible company with additional staff may be able to offset employer National Insurance, changing the salary calculation.
Before setting payroll, compare several salary levels and include PAYE, employee National Insurance, employer National Insurance, Corporation Tax relief and administration. Review the decision at the start of each tax year rather than automatically repeating last year’s figure.
Do dividends count as earnings?
Dividends are investment income, not earnings. They do not build a National Insurance record and are not relevant earnings for the purpose of supporting personal pension contributions.
This does not mean a director cannot fund a pension. The company may be able to make employer pension contributions, subject to the rules and the contribution being justifiable for the business. Personal contribution relief depends on relevant earnings and annual allowance rules.
How benefits and allowances can change the answer
A larger dividend can increase adjusted net income. That can affect the Personal Allowance, High Income Child Benefit Charge, student loan repayments and eligibility for tax-free childcare. It may also push other income into a higher band.
Scottish taxpayers have different Income Tax bands for salary, although dividend tax rates are UK-wide. Directors moving between parts of the UK should confirm their residence position for the tax year.
Common salary and dividend mistakes
- Taking dividends when the company lacks distributable reserves.
- Using the company bank account as a personal account.
- Failing to run salary through PAYE on time.
- Producing dividend vouchers months after the payment.
- Ignoring other income when estimating the dividend tax band.
- Assuming the £500 dividend allowance means the first £500 is excluded from income.
- Copying another director’s salary without checking Employment Allowance or National Insurance.
- Leaving insufficient cash for Corporation Tax, VAT or PAYE.
When should dividends be declared?
Dividends should be considered only after reliable accounts show sufficient profit. A company can pay interim dividends during the year, but directors should keep evidence of the decision and the financial position at that time.
The payment date affects the shareholder’s tax year. Declaring or crediting a dividend near 5 April requires particular care because the legal and accounting facts determine when it is treated as received.
A practical 2026/27 planning process
- Forecast company profit before director remuneration.
- Confirm available distributable reserves and cash.
- Review the director’s other income and tax code.
- Check National Insurance history and benefit considerations.
- Model sensible salary levels, including employer costs.
- Estimate Corporation Tax after the chosen salary.
- Plan dividends within available profit and personal tax bands.
- Reserve cash for company and personal tax bills.
- Keep payroll, board minutes and dividend vouchers up to date.
- Review the plan when profit or personal circumstances change.
Get salary and dividend planning right
The strongest remuneration strategy balances tax efficiency with lawful paperwork, cash flow and long-term goals. Real Key Accountancy can model salary, dividends, pensions and retained profit for your company, then keep the supporting accounts and payroll records accurate.
Contact us for tailored director remuneration planning for 2026/27.
Frequently asked questions
Can I take dividends without taking a salary?
Potentially, if you are a shareholder and the company has sufficient distributable profit. However, taking no salary can affect National Insurance credits and may not produce the best overall result.
Are dividends an allowable company expense?
No. Dividends are distributions of profit after Corporation Tax, not an expense deducted when calculating taxable profit.
Can I pay myself the same dividend every month?
A company may pay regular interim dividends, but each payment needs sufficient distributable profit and proper records. It should not be treated as an automatic salary substitute.
Must dividends be reported on a tax return?
If you complete Self Assessment, dividend income must be included. Other reporting options may apply where a return is not otherwise required, depending on the amount.
This article provides general information for the 2026/27 tax year and is not personalised tax, legal or investment advice. Tax rules and rates can change.