Salary vs Dividends 2026/27: A Guide for Company Directors
A source-backed 2026/27 guide to director salary, dividends, National Insurance, distributable profits, pensions and the records needed before taking money from a company.
Last reviewed: 3 September 2026 · Editorial policy
The decision is not just tax rate comparison
Salary can create PAYE and National Insurance costs, but it may also support pension contributions, mortgage evidence, and benefit entitlement. Dividends avoid National Insurance but can only be paid from distributable profits after Corporation Tax.
Common director pattern
Many owner-directors use a modest salary plus dividends, then revisit the numbers each tax year. The right mix depends on other income, company profits, Employment Allowance eligibility, pension plans, student loans, and cash needs.
Where advice is valuable
Get advice where profits are rising, income is near a tax threshold, you want to make pension contributions, the company has multiple shareholders, or dividends may not be covered by distributable reserves.
Start with the company’s capacity to pay
Salary is remuneration for the director’s office or employment and normally runs through payroll. A dividend is a distribution to shareholders and can only be paid from profits available for distribution. Cash in the bank does not prove those profits exist.
Prepare current accounts before declaring a dividend, especially when profits are falling or Corporation Tax and other liabilities have not yet been paid. Record the decision and give each shareholder a dividend voucher. An unsupported payment may become an unlawful distribution or director-loan item rather than the dividend intended.
Use the current 2026/27 figures
The standard Personal Allowance is £12,570, subject to the adjusted-net-income taper. The dividend allowance is £500. For 2026/27, dividend income above available allowances is taxed at 10.75% in the basic-rate band, 35.75% in the higher-rate band and 39.35% in the additional-rate band.
For most employees, employee National Insurance is 8% between the £12,570 primary threshold and £50,270 upper earnings limit, then 2% above. Most employer contributions are 15% above the £5,000 secondary threshold. Director and special-category calculations can differ, and Employment Allowance is not available to every company.
| 2026/27 item | Published amount or rate | Why it matters |
|---|---|---|
| Standard Personal Allowance | £12,570 | May be used by salary and other income; tapers above £100,000 adjusted net income |
| Dividend allowance | £500 | 0% dividend rate within the allowance, but income still uses tax bands |
| Dividend rates | 10.75% / 35.75% / 39.35% | Rate follows the band reached by total income |
| Employer secondary threshold | £5,000 a year | Most employer NI begins above this level |
| Main employer NI rate | 15% | Company cost unless a relief or special category applies |
Model all layers, not a single tax rate
A salary can reduce company taxable profit when incurred wholly and exclusively for the trade, but may create PAYE and National Insurance. A dividend is paid from post-Corporation-Tax distributable profit and does not attract National Insurance, then can create personal dividend tax.
Put salary, employer NI, Corporation Tax, dividend tax, Employment Allowance eligibility and other personal income into one model. Include the value of pension contributions and state-benefit or contribution-record considerations where relevant. A result based only on “dividends have no NI” is incomplete.
Factors that change the answer
The best mix can change with multiple directors or shareholders, other employment, rental or investment income, student loans, Child Benefit, the Personal Allowance taper, losses, associated companies and planned pension contributions. Share rights also determine who can receive each class of dividend.
Recalculate before an unusual bonus or dividend and again near year end. Do not backdate payroll or dividend paperwork to fit an after-the-fact tax target.
Keep an extraction ledger
Label every payment when it is made: salary, expense reimbursement, dividend, pension contribution, repayment of money owed to the director or director loan. Reconcile the director-loan account monthly and retain payroll reports, expense evidence, board minutes and vouchers. Clear records prevent the year-end accounts from reclassifying unexplained drawings unexpectedly.
Frequently asked questions
Can I take a dividend whenever the company has cash?+
No. The company needs sufficient profits available for distribution and should prepare supporting records when the dividend is declared.
Are dividends free of National Insurance?+
Dividends do not normally attract employee or employer National Insurance, but they are paid from post-tax profits and can create personal dividend tax.
What is the best director salary for 2026/27?+
There is no universal figure. Employment Allowance, other employees, company profit, other income, pension plans and benefit-record considerations all affect the result.