Why the split matters
As a director-shareholder, you have two main ways to take money out of your company: salary (PAYE income) and dividends (a share of post-tax profits). Each is taxed differently. Used together, they let you legitimately minimise the combined corporation tax, income tax and National Insurance bill.
For 2026/27, three things drive the maths:
- The Secondary Threshold for employer National Insurance — pay yourself above it and the company starts paying employer NI.
- The Personal Allowance — the first slice of personal income that's tax-free.
- The Dividend Allowance — a tax-free band on dividends, reduced compared to previous years.
Get those three working together and your personal extraction is as tax-efficient as the law allows.
What salary should you pay yourself?
For most director-only companies, the optimal salary is the level at which you start getting the maximum NI credit without triggering employer National Insurance. In 2026/27 this usually means a salary around the Secondary Threshold.
Three scenarios are common:
- Director only, no other employees: a salary up to the Secondary Threshold is the sweet spot — you build NI credits towards your state pension at no NI cost to the company.
- Director plus at least one other employee: you can usually claim the Employment Allowance, which means a slightly higher salary (up to the Personal Allowance) becomes optimal because corporation tax relief on the salary outweighs the NI cost the allowance covers.
- Higher-rate director with other income: the calculations get more nuanced — bonuses, pensions and salary sacrifice may all change the picture. This is where an accountant earns their fee.
Rule of thumb for 2026/27: a sole director takes a small salary near the Secondary Threshold and tops up with dividends. Your accountant will pin down the exact figure for your circumstances.
How dividends are taxed in 2026/27
Dividends sit on top of your other taxable income. The first slice is covered by your remaining Personal Allowance, then the Dividend Allowance, then the dividend tax rates kick in at basic, higher and additional rates.
The Dividend Allowance has been reduced significantly in recent years, so it covers a smaller tax-free slice than it did in 2021/22 — which is why optimising the salary side matters more than ever.
| Dividend income band | Rate (2026/27) |
|---|---|
| Within remaining Personal Allowance | 0% |
| Within Dividend Allowance | 0% |
| Basic rate band | Ordinary dividend rate |
| Higher rate band | Higher dividend rate |
| Additional rate band | Additional dividend rate |
Dividends can only be paid from distributable reserves — post-tax profits the company has accumulated. Pay yourself a dividend you can't legally support and HMRC can re-classify it as a loan, with messy tax consequences.
Three worked examples
Example 1: Profits of £40,000
A modestly profitable one-person company. Take the small "optimal" salary to use Personal Allowance and build state pension credit, then dividends up to (or just past) the basic-rate band depending on whether you want to retain profit in the company. Effective combined tax rate is typically in the low 20s%.
Example 2: Profits of £80,000
You're into higher-rate territory if you extract everything. Many directors leave some profit inside the company for next year, take dividends to the top of the basic rate band, and make a personal pension contribution to push some of the higher-rate dividend tax down. Talk to your accountant before drawing.
Example 3: Profits of £150,000+
The marginal corporation tax rate from £50,001 to £250,000 bites here. A pension contribution by the company is often more efficient than extracting cash and contributing personally. The salary-vs-dividend conversation merges into a wider compensation plan.
Every situation is different. Your IGI accountant runs the calculations using your actual figures and recommends a split in writing each tax year. Get a fixed-fee quote in two minutes.
Watch-outs and pitfalls
- Don't pay dividends from cash you don't have. Profit and cash aren't the same thing. Check your reserves before declaring a dividend.
- Keep proper paperwork. Each dividend needs a board minute and a dividend voucher. Skip this and HMRC may not treat it as a dividend at all.
- Mind the High Income Child Benefit Charge. If you receive Child Benefit and your individual income passes the threshold, the charge claws it back.
- Consider pensions. Company pension contributions reduce corporation tax and don't count as personal income — often more efficient than taking the cash and contributing yourself.
- Re-check every April. Rates and allowances change. A split that was perfect in 2024/25 may not be in 2026/27.
Action checklist
- Confirm your optimal salary with your accountant before the start of the tax year.
- Set up RTI payroll for the salary if you haven't already.
- Forecast distributable reserves at least quarterly so you know what you can take.
- Draft dividend minutes and vouchers for every dividend.
- Review combined tax with your accountant before each year end — consider pension contributions, retained profit and timing of dividends.
Frequently asked questions
Combining both is almost always the most tax-efficient route for a UK limited-company director. The optimal salary is usually small and uses the Secondary Threshold or Personal Allowance, with dividends on top.
The Dividend Allowance is a tax-free band that applies after your Personal Allowance is used. It has been reduced in recent years, so the band is smaller than in previous years — confirm the exact figure with your accountant.
Yes. Each dividend should be supported by a board minute declaring the dividend and a dividend voucher provided to the shareholder. Without that paperwork HMRC can dispute the payment.