Most limited company directors pay themselves through a mix of salary and dividends. With dividend tax rates rising from April 2026, it's worth revisiting how you take money out of your company. Here's how salary and dividends are taxed in 2026/27, and what to consider when choosing the mix.
One of the advantages of running a limited company is flexibility over how you pay yourself. Most directors take a combination of salary and dividends, and getting the balance right can make a real difference to how much tax you pay. The rules changed on 6 April 2026, when dividend tax rates went up, so even if your approach worked well last year, it's worth checking it still does. Here's how it works for 2026/27.
How a director's salary is taxed
A director's salary is paid through payroll like any other employee's. It's an allowable business expense, so it reduces your company's Corporation Tax bill, but Income Tax and National Insurance apply through PAYE. The key figures for 2026/27 are:
- Personal Allowance: £12,570, the amount you can earn before paying Income Tax
- Employee National Insurance: 8% on earnings between £12,570 and £50,270, and 2% above that
- Employer National Insurance: 15% on earnings above £5,000 a year
- Lower earnings limit: £6,708 a year, the level at which a salary counts towards your State Pension
How dividends are taxed in 2026/27
Dividends are paid to shareholders out of the company's profits after Corporation Tax. They aren't a business expense, so they don't reduce Corporation Tax, but no National Insurance is due on them. Everyone has a £500 dividend allowance, and dividends above that are taxed at these rates from 6 April 2026:
- Basic rate: 10.75% (up from 8.75%)
- Higher rate: 35.75% (up from 33.75%)
- Additional rate: 39.35% (unchanged)
Dividends are taxed after your salary and other income, so the rate that applies depends on your total income. The basic rate band covers income up to £50,270, including your Personal Allowance.
Why a mix of salary and dividends usually works best
Because salary attracts National Insurance and dividends don't, many directors take a modest salary and top up their income with dividends. Salary is paid before Corporation Tax and dividends after it, so the right balance depends on your company's profits and your personal circumstances. Two salary levels come up most often:
- A salary of around £5,000, the employer National Insurance threshold, which avoids employer National Insurance altogether
- A salary of £12,570, which uses your full Personal Allowance with no employee National Insurance, but some employer National Insurance on the amount above £5,000
Which works better depends largely on whether your company can claim the Employment Allowance. It reduces employer National Insurance by up to £10,500 a year, but a company whose only employee paid above the threshold is a single director can't claim it. A salary above £6,708 also keeps your State Pension record building. This is exactly where tailored advice is worth having, because the right answer changes with your profits and other income.
Rules to follow when paying dividends
- Dividends can only be paid from profits available for distribution, after Corporation Tax. Paying dividends the company can't afford can make them unlawful, and you may have to repay them
- Dividends are paid in proportion to shareholdings, within each class of share
- Record every dividend properly, with board minutes and a dividend voucher
- Don't take regular round sums without paperwork, because undocumented withdrawals can end up treated as a director's loan
Reporting dividends on your tax return
Dividend tax isn't deducted at source. If your dividends go above your allowances, you'll usually need to report them through Self Assessment and pay the tax by 31 January after the end of the tax year. Setting money aside each time you take a dividend avoids a nasty surprise in January.
Other ways to take value from your company
Salary and dividends aren't the only options. Employer pension contributions paid by the company are usually an allowable business expense and don't attract National Insurance, making them one of the most tax-efficient ways to take profit for the long term. Reimbursing genuine business expenses you've paid personally is tax-free, too. Your accountant can help you weigh these up alongside salary and dividends.
Get your pay mix right for 2026/27
We help directors across Bristol and the UK plan their salary and dividends each year, run the payroll, prepare the paperwork and file their personal tax returns, so the whole picture fits together. If you'd like a review of how you pay yourself for 2026/27, talk to our personal tax team or get in touch.
Frequently asked questions
What are the dividend tax rates for 2026/27?
From 6 April 2026, dividends above the £500 allowance are taxed at 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
What is the most tax-efficient director's salary for 2026/27?
There's no single answer. Many directors choose a salary of around £5,000 or £12,570 and then take dividends. The best level depends on whether your company can claim the Employment Allowance, your profits and your other income, so it's worth getting advice for your situation.
Do I pay National Insurance on dividends?
No. National Insurance isn't charged on dividends, which is the main reason directors often take part of their income this way. Dividends are paid from profits after Corporation Tax, though.
Can I pay dividends if my company made a loss this year?
Only if the company has enough retained profits from earlier years to cover them. Dividends must come from profits available for distribution, and paying them without enough profit can make them unlawful.
