Most limited company directors know they should pay themselves a mix of salary and dividends. Far fewer know the exact figures — or how much getting it wrong costs annually. On £80,000 profit, the difference between an optimised and an unoptimised approach is over £15,000 in tax. This guide gives you the exact numbers for 2026–27.
When you run a limited company, the company pays corporation tax on its profit. What remains can stay in the company or be extracted by you as the director. The method of extraction determines how it is taxed — and different methods attract dramatically different rates.
A salary paid through PAYE triggers income tax and National Insurance on both you and the company. At higher amounts this becomes expensive quickly — employer NI at 13.8% alone adds significant cost before any personal tax. Dividends, paid from post-corporation-tax profits, are taxed at lower personal rates and attract no NI whatsoever. The optimal strategy combines a carefully chosen salary with dividends up to the most efficient threshold.
For most directors in 2026–27, the optimal salary is £12,570 — the Personal Allowance. At this level you pay no income tax on the salary. You pay minimal employee NI. The company pays employer NI on the amount between £9,100 (the Secondary Threshold) and £12,570, which amounts to approximately £472 — but this cost is offset because the salary is deductible against corporation tax, saving 19% on that amount.
Some directors prefer a salary of £9,100 to eliminate employer NI entirely. This can work at lower profit levels or with other income in play, but for most directors earning above £30,000 in company profit, the £12,570 salary produces the better overall outcome once corporation tax relief is factored in.
Personal Allowance: £12,570 — no income tax below this
Secondary Threshold (employer NI): £9,100 — employer NI at 13.8% on salary above this
Basic rate band top: £50,270 — 20% income tax and 8.75% dividend tax below this
Dividend allowance: £500 — tax-free each year
Basic rate dividend tax: 8.75%
Higher rate dividend tax: 33.75%
The two scenarios below show what a director takes home from £80,000 company profit under an unoptimised approach versus the correct salary and dividend split.
The optimised approach saves £15,518 on £80,000 profit. That compounds year on year. A director who has been paying themselves entirely as salary for five years has likely overpaid more than £75,000 in tax.
Once salary and basic rate dividends are taken, additional dividends fall into the higher rate at 33.75%. At that point it often makes more sense to retain profit in the company, make employer pension contributions, or invest through the company — all more efficient than drawing further dividends at the higher rate.
| Company profit | Optimal salary | Dividends (basic rate) | Approx. total tax | Effective rate |
|---|---|---|---|---|
| £40,000 | £12,570 | £21,166 | £7,120 | 17.8% |
| £60,000 | £12,570 | £37,120 | £11,890 | 19.8% |
| £80,000 | £12,570 | £50,804 | £17,711 | 22.1% |
| £120,000 | £12,570 | Up to £50,270, retain rest | £27,400+ | 22.8%+ |
One of the most significant and most overlooked tax planning opportunities for directors is making a spouse or civil partner a shareholder. If your spouse is a genuine shareholder — meaning they hold shares in the company and are not simply a nominee for you — dividends paid to them use their own Personal Allowance and basic rate band.
A spouse with no other income can receive up to £12,570 in dividends tax-free (covered by their Personal Allowance) and up to £50,270 in total dividends at the basic rate of 8.75%. On a company profit of £100,000, splitting dividends between two shareholders can save an additional £5,000–£8,000 per year compared to a single shareholder structure.
A spousal shareholding must reflect a real commercial arrangement. Your spouse should receive dividends proportional to their shareholding and the arrangement should be documented properly. HMRC has challenged arrangements that appear to exist purely for tax avoidance. Speak to an accountant before restructuring.
The dividend allowance — the amount you can receive tax-free — is £500 for 2026–27. This has been cut significantly from £2,000 in 2022–23 and £5,000 before that. The first £500 of dividends each year are tax-free; everything above that within your basic rate band is taxed at 8.75%. The reduction has increased the cost of the salary and dividend strategy modestly, but it remains far more efficient than a full salary at any meaningful profit level.
Paying too much salary. Every pound of salary above £12,570 costs more in income tax and NI than an equivalent dividend. Some directors take a higher salary for security or simplicity — but the tax cost is real.
Ignoring corporation tax. Dividends come from post-corporation-tax profits. The full picture is corporation tax plus personal tax. Some approaches that look efficient on the personal tax side are less efficient once you account for what the company already paid.
Not adjusting as profit changes. The optimal dividend amount changes throughout the year as company profit grows or falls. A director drawing fixed monthly dividends set at the start of the year may find they have either underpaid tax or left money unnecessarily in the company by year end. The split needs to flex with the numbers.
For directors at higher profit levels where additional dividends fall into the 33.75% higher rate, employer pension contributions are worth considering. Company contributions are deductible against corporation tax, attract no NI on either side, and the annual allowance for 2026–27 is £60,000. For directors earning above £80,000 from their company, maxing pension contributions before drawing excess dividends is typically the most efficient approach.
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This article is for general guidance only using 2026–27 HMRC rates: corporation tax 19% (up to £50,000 profit), Personal Allowance £12,570, dividend allowance £500, basic rate dividend tax 8.75%, higher rate dividend tax 33.75%, employer NI Secondary Threshold £9,100. All calculations are approximations. Tax rules are complex — always verify with a qualified accountant. Taxify provides guidance, not regulated financial advice.