Written for 2026/27 · Last reviewed October 2026
This guide is information only. It does not constitute personalised tax advice. Your circumstances — including other income, pension plans and company structure — affect your outcome. Speak to a
qualified accountant for advice specific to your situation.
If you run a limited company, at some point you have had to decide how to pay yourself. The familiar answer — a small salary topped up with dividends — is broadly right for many directors. But “broadly right” is not the same as “optimal for your situation this tax year.”
The salary versus dividends question is a calculation, not a default setting. The dividend allowance, National Insurance thresholds, corporation tax relief on salary, and the way pension contributions interact with your pay structure all affect what the most efficient split looks like on your specific numbers. A structure that worked well three years ago may not be the most efficient one for 2026/27.
This guide covers the tax mechanics behind both options, walks through the most common director pay structures, and links to our calculator so you can run your own figures. If you are still weighing up whether to operate as a limited company at all, our guide to sole trader vs limited company covers that decision first.
Understanding why the combined approach is often more efficient starts with understanding how each income type is treated by HMRC.
Salary is a business expense. It is deductible from company profits before corporation tax is applied — so every pound of salary reduces the company’s taxable profit. That deduction has real value.
The trade-off is that salary is subject to:
The employer NI element is particularly significant at higher salary levels. It is a genuine cash cost to the company, not a paper figure, and it reduces the profits available for dividends.
Dividends are paid from post-corporation-tax profits. The company has already paid tax on those profits before a dividend is declared. Dividends are then taxed at dividend rates — which
are lower than the equivalent income tax rates for basic, higher, and additional rate taxpayers — and, crucially, they are not subject to National Insurance at all.
There is also an annual dividend allowance: an amount of dividend income you can receive each year before dividend tax applies. The allowance has reduced significantly in recent years and can change at each Budget. Check the current figure on GOV.UK before planning, rather than relying on an older source.
The rates and allowances referenced in this guide are illustrative. Confirm current figures via HMRC or speak to your accountant.
For most directors, dividends are more tax-efficient per pound of take-home — you avoid employer and employee National Insurance, and you pay tax at lower dividend rates. But dividends are not zero-tax, and the question is not salary or dividends — it is how much of each, in what proportions, given your full financial picture.
The fastest way to see the numbers for your own situation is to use our dividend tax calculator.
Try a starting point of £12,570 salary with the remainder of your planned drawings as dividends. The calculator shows estimated take-home, effective combined rate, and the approximate NI saving compared with an all-salary equivalent.
Important: This calculator is a guide only and uses simplified assumptions. Your personal circumstances, other income sources, pension contributions, company structure and tax year will all
affect your actual outcome. Speak to your accountant for your situation.
Most limited company directors use one of three broad approaches. Here is the logic behind each and the considerations that apply.
The most widely used structure. The director sets their salary at — or just above — the Lower Earnings Limit (LEL): the threshold at which you qualify for National Insurance credits, including State Pension entitlement, without triggering an actual NI charge. Many directors instead set salary at the personal allowance level (£12,570 in 2026/27), using the full income tax-free band and receiving modest corporation tax relief on the expense.
At this salary level:
The result is a materially lower combined tax and NI bill compared to the same total income taken entirely as salary.
Some directors take a higher salary — up to the point where income tax would move into the higher rate. This can make sense when:
The trade-off is higher employer NI on salary above the secondary threshold, and higher income tax compared to Structure A.
Occasionally chosen, but rarely optimal. The significant risks:
All figures are illustrative and for guidance only, based on simplified standard assumptions for 2026/27. Your actual position will vary based on personal circumstances, other income sources, pension
contributions, and company structure. Speak to a qualified accountant for figures specific to your situation.
| Total annual drawings | Structure | Salary | Dividends | Approx. combined tax & NI | Est. take-home (guide only) |
|---|---|---|---|---|---|
| £40,000 | A: Min salary + dividends | £12,570 | £27,430 | ~£3,500 | ~£36,500 |
| £40,000 | B: All salary | £40,000 | £0 | ~£9,200 | ~£30,800 |
| £60,000 | A: Min salary + dividends | £12,570 | £47,430 | ~£9,800 | ~£50,200 |
| £60,000 | B: All salary | £60,000 | £0 | ~£17,400 | ~£42,600 |
| £80,000 | A: Min salary + dividends | £12,570 | £67,430 | ~£17,000 | ~£63,000 |
| £80,000 | B: All salary | £80,000 | £0 | ~£27,500 | ~£52,500 |
The efficiency gap between Structure A and all-salary tends to widen as total drawings increase, because higher-rate dividend tax is still lower than the combined higher-rate income tax and National Insurance cost.
The scenarios above use simplified assumptions. In practice, several factors can shift your optimal structure significantly.
Pension contributions. Pension tax relief and annual allowance are both linked to your relevant UK earnings — broadly, salary rather than dividends. If meaningful pension contributions are part of your financial plan, you may need a higher salary base to support the relief available. Taking too little salary can limit your pension efficiency in ways that cost more than the NI saving.
Mortgage applications. Most lenders have their own policies on how they treat dividend income, and some require a minimum salary for full affordability calculations. If you are planning a
mortgage application in the next one to two years, discuss your salary level with a mortgage broker before your company year-end.
State Pension entitlement. To build a qualifying year for State Pension purposes, your earnings must be at or above the Lower Earnings Limit. If your salary falls below this threshold, no
qualifying year is recorded. Check the current LEL on GOV.UK — it is set annually.
IR35 status. If you are inside IR35 — assessed using HMRC’s CEST tool or by contract analysis — dividends from that engagement are treated as employment income for tax purposes. The
salary-plus-dividends structure loses most of its efficiency for income caught by IR35. Your limited company accountants can help you assess your position.
Partner or spouse shareholdings. Where a spouse or partner holds shares in the company, dividends can be distributed between two taxpayers — each using their own personal allowance,
dividend allowance, and lower-rate bands. This has its own compliance requirements and is not straightforward to implement retrospectively. Our tax planning services can help you
assess whether this applies.
These factors interact in ways a calculator cannot fully capture. This is precisely where working with an accountant adds clear value.
Your salary and dividend split is not a one-time decision. Review it:
Ideally, review your pay structure before your company year-end, not after. Decisions made after the year has closed have far fewer options available. Talk to your limited company accountants at AccTek ahead of time.
For most directors, a combination of a small salary and dividends is more tax-efficient than paying yourself entirely through salary. Salary attracts income tax and National Insurance contributions; dividends are taxed at lower dividend rates with no National Insurance. However, the optimal split depends on your total drawings, pension plans, mortgage situation, and IR35 status. There is no single right answer — the right structure for your figures requires a review specific to your situation. See HMRC’s guidance on dividend tax. This is information, not personalised advice.
Many directors set their salary at the personal allowance (£12,570 in 2026/27) or just above the Lower Earnings Limit — the threshold that qualifies you for National Insurance credits without triggering an NI charge. Which approach is more efficient depends on your total drawings, the employer NI secondary threshold, and whether the corporation tax relief on a slightly higher salary outweighs the NI cost. Check current thresholds at GOV.UK and HMRC’s NI page. This is information, not personalised advice.
No. Dividends are not subject to National Insurance contributions — either employee or employer NI. This is one of the primary tax advantages of the salary-plus-dividends structure for limited company directors. However, if your salary falls below the Lower Earnings Limit, you will not build a qualifying year towards your State Pension for that tax year. See HMRC’s NI guidance.
There is an annual dividend allowance — an amount of dividend income you can receive before dividend tax applies. The allowance has been reduced several times in recent years and can change at each Budget. Check the current figure on the HMRC dividend tax page rather than relying on an older source. Dividend income above the allowance is taxed at dividend rates depending on your total income level. This is information, not personalised advice.
AccTek is aj accountancy practice. AIA and ICPA member. AML-supervised by HMRC.
This guide is information only — it does not constitute personalised tax advice. Your individual circumstances, including other income sources, pension plans, company structure and IR35 status, will
all affect your outcome. Speak to a qualified accountant for advice specific to your situation.
Godwin Pinto ACA (ICAI) is the founder of AccTek and a member of ICPA, with 20+ years of experience in accounting and tax for contractors, startups and SMEs. Previously at PwC.
AccTek is a member firm of the Institute of Certified Practising Accountants (ICPA), and our founder is a member of the Association of International Accountants (AIA) holding an AIA Practising Certificate. Our accountants hold qualifications and accreditations from trusted professional bodies including the AIA, ICPA, AAT and ACCA.
