Most owner-managed UK companies pay their directors a small salary and the rest as dividends. The best split changes with each Budget, and 2026/27 brings higher dividend tax rates.
What changed for 2026/27
- Dividend tax rates rose from 6 April 2026: the ordinary rate is 10.75% (from 8.75%) and the upper rate 35.75% (from 33.75%). The additional rate stays at 39.35%.
- Dividend allowance: £500 a year, tax-free.
- Personal allowance: £12,570, frozen.
- Employer National Insurance: 15% above £5,000 a year, with an Employment Allowance of up to £10,500 for eligible companies.
The salary decision
A salary is a deductible cost for corporation tax, but may cost employee and employer NI. Common choices are:
- £12,570: uses the full personal allowance. Often best where the company can claim the Employment Allowance, which usually means it has other employees, so employer NI is covered.
- £5,000 or the lower earnings limit: often better for single-director companies that cannot claim the Employment Allowance, because employer NI applies above £5,000.
A salary at or above the lower earnings limit keeps your National Insurance record for the State Pension.
The dividend decision
Dividends come from profits after corporation tax (19% to 25%). They carry no NI, but the higher dividend rates from April 2026 narrow the gap with salary for higher earners. Pension contributions paid by the company can be more efficient than either for profits you do not need now.
Work it out for your numbers
Try our director salary or dividends calculator, which uses 2026/27 rates. For a full plan covering pensions, timing and your spouse's shareholding, talk to our finance director service for UK businesses.
General information, not personal tax advice.
