Salary or dividends in 2026/27: how should a company director pay themselves?

In short: No single split suits every director, so compare salary and dividends from the same company budget using the 2026/27 figures. The personal allowance is £12,570. Employer National Insurance is 15% on a standard employee's salary above £5,000 a year (GOV.UK: Rates and thresholds for employers 2026 to 2027). Dividends above the £500 dividend allowance are taxed at 10.75%, 35.75% or 39.35%, depending on your tax band (GOV.UK: Tax on dividends). Salary is normally deductible for Corporation Tax; dividends are paid out of profits after Corporation Tax.

Compare salary and dividends using the same total company budget, including employer National Insurance and Corporation Tax. A salary can be deductible for the company but brings payroll taxes. A dividend is paid from available profits after Corporation Tax and can bring personal dividend tax. The right mix depends on the company and the director's other income; one salary figure cannot suit everyone. HMRC explains the two payment routes.

This guide uses the UK tax year 6 April 2026 to 5 April 2027. The worked salary examples use England, Wales and Northern Ireland rates. Scotland has different employment Income Tax bands, so Scottish salary outcomes need a separate calculation.

How are salary and dividends taxed differently?

Salary and dividends affect different parts of the tax calculation. Commercial remuneration for work is normally a company cost, while dividends distribute profits and do not reduce the company's Corporation Tax bill. The director then considers the personal taxes on what they receive. A comparison that stops at the company deduction misses half the decision.

The label must match what actually happened. A bank transfer cannot safely become a dividend simply because that produces a preferred tax result. Read why dividends are not Corporation Tax expenses for the records and classification checks.

Which 2026/27 figures change the comparison?

For a standard category A employee, employer NI is 15% above the £5,000 annual secondary threshold. Employee NI is 8% between £12,570 and £50,270, then 2% above that. These thresholds have different purposes: a salary within the personal allowance can still create an employer NI bill. HMRC's 2026/27 employer tables contain the rates and director references.

Dividend tax above the available £500 dividend allowance is 10.75%, 35.75% or 39.35%, depending on the band. Dividends also use tax-band space, including the part covered by the dividend allowance. They are added to other income when establishing the applicable rates. HMRC's dividend-tax guide explains the calculation.

Corporation Tax introduces another variable. A company might qualify for the 19% small profits rate, pay 25%, or fall within marginal relief. Associated companies and short periods affect the limits. Use the actual computation rather than assuming every extra deductible pound saves the same percentage. HMRC's Corporation Tax rates set out the framework.

What does the same £10,000 company budget produce?

In the illustration below, a dividend produces more immediate take-home cash than an additional bonus, but only under the stated assumptions. The comparison starts after an existing salary has already been funded and considers the next £10,000 of company profit. It is not a recommendation for the best total annual salary.

Assumptions: a full-year director under State Pension age, aged at least 21, with standard category A NI; salary already £12,570; no other personal income, benefits, pension deductions or student loans; the £500 dividend allowance remains unused. The company has one director who is its only employee, cannot claim Employment Allowance, and has £30,000 of taxable trading profit after existing salary and employer costs but before this extra bonus. It has a full 12-month period, no associated companies or other income, qualifies for 19% Corporation Tax, and has sufficient cash and distributable profits.

The bonus fits the budget because £10,000 ÷ 1.15 = £8,695.65, with employer NI on top. The director then retains 72% after the assumed 20% Income Tax and 8% employee NI. The dividend route leaves £10,000 × 81% = £8,100 after Corporation Tax. Personal dividend tax is (£8,100 − £500) × 10.75% = £817.

The £1,022.13 difference is specific to this incremental example. Figures are rounded to pennies; payroll rounding can cause small differences. The company's total annual Corporation Tax is not zero in the bonus route: the zero in the table refers only to the £10,000 slice eliminated by deductible bonus and employer NI.

What changes if the company can claim Employment Allowance?

Employment Allowance can reduce eligible employer NI, altering the salary comparison. A company with only one director cannot claim where that director is its only employee liable for secondary Class 1 NI. Adding another person to the payroll is not a reason to assume eligibility without checking the actual conditions. HMRC explains Employment Allowance eligibility.

For a second illustration, assume an otherwise comparable eligible employer has at least £1,500 of unused allowance that would not be used elsewhere. It can fund a £10,000 bonus with the same £10,000 net company budget, because the extra £1,500 employer NI is covered. Under the same personal-tax assumptions, the director keeps £10,000 − £2,000 Income Tax − £800 NI = £7,200.

The dividend result remains £7,283 in this illustration, reducing the gap to £83. This demonstrates why eligibility and unused allowance belong in the calculation, rather than in a footnote after a universal recommendation.

What should you check before paying yourself?

Start with the company's available profits and the director's full income picture. Include other employment, dividends elsewhere, pension contributions, student loans, benefits and any Scottish tax position. Decide how much cash the business must retain for tax and working capital. Minimum-wage duties can also matter where the director is a worker under an employment contract.

Keep salary decisions within the payroll process and dividends within the dividend declaration process. If a director owes the company money, classify that balance separately instead of assuming a later dividend automatically corrects earlier transactions. The director's loan guide explains the distinction.

To check the company side of your comparison, use Taxley's Corporation Tax calculator. It helps you examine company tax; it is not a salary-and-dividend optimiser or a calculation of your personal tax return.

Frequently asked questions

Is a £12,570 salary free of all tax?

No. Even where no employee Income Tax or NI arises, standard employer NI can be due above its lower threshold. Employment Allowance eligibility can change the company's net cost.

Can I pay a dividend because the company has money in the bank?

Cash alone is insufficient. A company can pay dividends only from distributable profits (Companies Act 2006 s.830), so establish available profits, shareholder entitlement and the required declaration and voucher before paying the dividend.

Are dividends always better than salary?

No. Other income, tax bands, employer NI relief, pension and benefit considerations can change the comparison. Compare the same total company cost under both routes before deciding.

Does the £500 dividend allowance create an extra basic-rate band?

No. Dividends covered by the allowance still count towards your Income Tax bands, so they can push other dividends into a higher rate. It is an allowance against dividend tax, not extra band space.

General information, not personalised tax or accounting advice.