Every director asks the same question eventually: should I pay myself a salary, take dividends, or some mix of both? The honest answer is “it depends” — but that’s not very useful at 11pm when you’re trying to set up payroll. So here’s what it actually depends on for 2026/27, with real numbers.

The short version: the old advice — “low salary, top up with dividends” — still mostly holds. But two things have shifted enough this year that it’s worth checking your own setup rather than copying last year’s split.

What’s changed for 2026/27

Two moving parts matter more than usual this year:

• Dividend tax has gone up again. Basic rate rises from 8.75% to 10.75%, higher rate from 33.75% to 35.75%. The £500 dividend allowance hasn’t moved. This is the fourth consecutive year dividends have got slightly more expensive.
• Corporation tax now bites harder for mid-sized profits. With the marginal rate sitting at an effective 26.5% for profits between £50,000 and £250,000, the corporation tax saving from paying salary instead of dividends is bigger than it used to be.

Put those two together and the gap between salary and dividends has narrowed. Dividends are still usually cheaper overall — but not by as much, and for some companies the answer has actually flipped.

If you’re a sole director with no employees

This is most owner-managed limited companies, and it’s the group where the calculation is most sensitive, because you can’t claim Employment Allowance — so any salary above £5,000 a year costs your company employer’s National Insurance at 15%, with nothing to offset it.

Two salary levels do most of the work here:

£6,708 — the Lower Earnings Limit. This is the minimum needed to count as a qualifying year for your State Pension, and it sits just below the level where employer NI starts costing you anything meaningful (around £256/year). For most sole directors, this remains the practical floor.

£12,570 — the personal allowance. This uses your full tax-free allowance, so there’s no income tax and no employee NI either. The trade-off is employer NI of roughly £1,136 on the slice between £5,000 and £12,570. Even with that cost, the corporation tax saving on the higher salary usually still comes out ahead by a few hundred pounds — but it’s genuinely close, and worth running the actual numbers rather than assuming.

There’s no single “right” answer between these two — it depends on your specific profit level and whether the extra corporation tax relief outweighs the NI hit in your case.

If your company qualifies for Employment Allowance

This is the bigger shift this year. If you have employees beyond yourself (and meet the eligibility rules), you can offset up to £10,500 of employer NI annually. That removes the main reason sole directors keep salaries low.

With Employment Allowance covering the NI cost, and corporation tax relief worth more than it used to be at higher profit bands, salary becomes a genuinely competitive option — in some cases more efficient than dividends, not just “almost as good.” If your company has grown to the point of taking on staff, this is worth revisiting properly rather than running the same sole-director playbook out of habit.

A worked example

Take a director extracting £50,270 in total for the year, comfortably within the basic rate band.

Traditional split — £12,570 salary, £37,700 dividends: Dividend tax comes to roughly £3,999. Corporation tax relief on the salary saves somewhere between £2,388 (at 19%) and £3,332 (at the 26.5% marginal rate), depending on your company’s profit band.

All salary, with Employment Allowance available: Income tax and employee NI together come to around £10,556 — more than the dividend route on the surface. But the corporation tax deduction is far larger too, saving between roughly £9,551 and £13,321 depending on your rate.

At the higher corporation tax bands, the all-salary route can edge ahead. At the lower 19% rate, the traditional split usually still wins, but by less than it used to.

This is exactly why “just do what you did last year” stops being good advice once your profit level or company structure changes.

What we’d actually do

We don’t run a fixed formula on this — we run your numbers. That means looking at your actual profit level, whether Employment Allowance applies, your personal income from other sources, and what you’re trying to optimise for (take-home cash now vs. pension contributions vs. long-term company value). The right split for a £40,000-profit sole-director company and a £200,000-profit company with three staff are not the same calculation, even if both directors are asking the identical question.

The takeaway

Dividends haven’t stopped being tax-efficient. But the margin has shrunk every year for four years running, and this year corporation tax changes have added a second variable into the mix. If you haven’t re-run your salary/dividend split since the Budget, that’s a better use of twenty minutes than assuming nothing’s changed.

If you would like us to run your specific numbers for 2026/27, book a Discovery Call — free, 30 minutes, no obligation.

 

FAQuestions

Is it better to take salary or dividends?

There is no universal answer. The most tax-efficient mix depends on company profits, other income sources, National Insurance costs, and whether Employment Allowance is available.

Can I take dividends every month?

Yes, provided the company has sufficient distributable profits and the dividends are properly documented.

Do dividends reduce Corporation Tax?

No. Unlike salary, dividends are paid from profits after Corporation Tax.

Can I pay myself only dividends?

In some circumstances, yes. However, many directors choose a salary as well to preserve State Pension entitlement and utilise personal allowances efficiently.

Should I review my remuneration every year?

Absolutely. Tax rates, thresholds, and company profits change regularly, making annual reviews worthwhile.