A director who owns their company decides how to be paid. Salary and dividends are taxed differently, the thresholds move every April, and in April 2026 the dividend rates rose by two percentage points, which changed the arithmetic for the first time in several years. This guide sets out the 2026/27 figures, the usual structure and why it works, what changed, and the paperwork that keeps it defensible.
The two routes
Salary is paid through PAYE. It is an expense of the company, so it reduces profit and Corporation Tax. On it the company pays employer National Insurance at 15% on earnings above £5,000 a year, and you pay income tax above the £12,570 personal allowance and employee National Insurance at 8% between £12,570 and £50,270 and 2% above. Salary counts towards your State Pension record if it is at least the lower earnings limit of £6,708 a year, and it must be reported to HMRC through Real Time Information to count at all.
Dividends are paid from profit after Corporation Tax. They are not an expense, so they do not reduce the company's tax. On you they carry no National Insurance and are taxed, above the £500 dividend allowance, at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above £125,140. They can only be paid when the company has distributable profits, and each one needs a board minute and a dividend voucher.
The usual structure and why
Most owner-directors take a salary of £12,570 and the rest as dividends. The salary uses the personal allowance, so it carries no income tax; it is deductible for Corporation Tax, saving 19% to 25%; and it exceeds the lower earnings limit, so the year qualifies for the State Pension. It costs employer National Insurance of 15% on £7,570, which is £1,135.50, and employee National Insurance of nothing, because £12,570 is exactly the primary threshold. A company with other employees usually covers the employer National Insurance with the £10,500 Employment Allowance; a sole-director company cannot claim it.
An alternative is a salary of £5,000, the employer National Insurance secondary threshold, which costs no National Insurance at all. It wastes £7,570 of personal allowance, which then shelters dividends instead, and dividends are taxed at 10.75% rather than the 19% or more that the salary would have saved in Corporation Tax. The dividend vs salary calculator shows both for your profit; the difference is usually a few hundred pounds a year and the £12,570 salary is more often the better of the two.
What changed in April 2026
The dividend basic and higher rates rose from 8.75% and 33.75% to 10.75% and 35.75%. The additional rate stays at 39.35%. For a director taking £40,000 of dividends above a £12,570 salary, that is about £760 more tax than the year before. The change does not reverse the logic of the salary-and-dividend structure, because dividends still avoid National Insurance of 8% or more, but it narrows the gap and makes two alternatives more attractive: employer pension contributions, and retaining profit in the company.
The section 455 charge on director's loans, which is set at the dividend higher rate, rose to 35.75% at the same time for loans outstanding nine months after a year end.
Pension contributions
An employer pension contribution is deductible for Corporation Tax, carries no National Insurance in either direction and is not taxed on the director, up to the £60,000 annual allowance, with unused allowance from the previous three years available to carry forward. For a director who does not need all of the company's profit as cash, it is the most efficient extraction route by a wide margin. The money is locked until pension age, which is the trade-off.
Retaining profit
Profit left in the company is taxed once, at Corporation Tax, and can be extracted in a later year when it may fall into a lower band, or on closure as capital. For businesses with fluctuating income this smoothing is valuable. The risks are that the money is exposed to the company's creditors and that the rules on extracting it later may change.
Thresholds to watch
Total income over £100,000 tapers the personal allowance away at £1 for every £2, producing an effective 60% marginal rate until it is gone at £125,140; dividends count. Adjusted income over £60,000 starts the High Income Child Benefit charge if you or your partner receive Child Benefit. Dividends that push total income over £50,270 move from the 10.75% to the 35.75% rate. Timing dividends across two tax years, or paying some to a spouse who holds shares, can keep income under these lines.
Spouses and shareholders
Shares can be held by a spouse or civil partner, and dividends paid on them are taxed on the holder, using their allowance and bands. The settlements legislation does not apply to ordinary shares with full rights given outright to a spouse, following the Arctic Systems case, provided the shares are genuinely theirs. Alphabet shares that allow different dividends to different holders need careful articles and genuine commercial substance.
The paperwork
Every dividend requires a board minute approving it and a dividend voucher recording the date, amount and recipient, and the company must have distributable reserves at the time. Dividends paid without reserves are unlawful and can be reclassified by HMRC as salary or loans. Drawings that are neither salary nor dividend sit on the director's loan account, and if the director owes the company money nine months after the year end the company pays the 35.75% section 455 charge until it is repaid. Salary must go through payroll with RTI submissions on or before each pay date.
Scottish directors
Scottish residents pay Scottish income tax on salary, with six bands from 19% to 48%, but UK rates on dividends. The interaction means the salary level still matters most at the personal allowance, and dividends above the Scottish higher rate threshold of £43,662 are still taxed at the UK dividend rate based on UK bands. The calculator applies both.
Setting it for the year
Decide the salary in April and run it through payroll monthly; our payroll service for a single director is £25 a month. Declare dividends when reserves allow, with the paperwork, which our limited company accounts service checks at year end. A director remuneration review at £249 models the coming year on your figures and other income.
A worked example
A company with £70,000 of profit before director pay. With a £12,570 salary, employer National Insurance is £1,135.50, leaving £56,294.50 taxable at Corporation Tax; the company is under £50,000 only if that figure is, so here it pays marginal-rate tax of about £11,860, leaving £44,430 for dividends. The director pays no income tax or National Insurance on the salary, and dividend tax of 10.75% on £37,200 of dividends within the basic band after the £500 allowance, plus 35.75% on the £6,730 above £50,270: roughly £6,400. Total take-home is about £50,600 on £70,000 of profit.
With a £5,000 salary instead, there is no employer National Insurance, Corporation Tax is slightly higher because the deduction is smaller, and the first £7,570 of dividends uses the spare personal allowance at 0%. The difference in take-home is a few hundred pounds, usually in favour of the £12,570 salary once the Corporation Tax deduction is counted. Adding a £20,000 employer pension contribution reduces Corporation Tax by £5,000 and moves £20,000 into the pension with no personal tax, which is why directors who can spare the cash do it.
Timing within the year
Salary runs monthly and is fixed in advance. Dividends can be declared at any time reserves allow, so the question of which tax year they fall in is yours to decide. A dividend declared on 31 March falls in the year just ending; one declared on 10 April falls in the next. Splitting a large dividend across the two years uses two allowances and two basic bands, and keeps each year's total income below the thresholds that matter.
A worked example
A company with £70,000 of profit before director pay. With a £12,570 salary, employer National Insurance is £1,135.50, leaving £56,294.50 taxable at Corporation Tax; the company is under £50,000 only if that figure is, so here it pays marginal-rate tax of about £11,860, leaving £44,430 for dividends. The director pays no income tax or National Insurance on the salary, and dividend tax of 10.75% on £37,200 of dividends within the basic band after the £500 allowance, plus 35.75% on the £6,730 above £50,270: roughly £6,400. Total take-home is about £50,600 on £70,000 of profit.
With a £5,000 salary instead, there is no employer National Insurance, Corporation Tax is slightly higher because the deduction is smaller, and the first £7,570 of dividends uses the spare personal allowance at 0%. The difference in take-home is a few hundred pounds, usually in favour of the £12,570 salary once the Corporation Tax deduction is counted. Adding a £20,000 employer pension contribution reduces Corporation Tax by £5,000 and moves £20,000 into the pension with no personal tax, which is why directors who can spare the cash do it.
Timing within the year
Salary runs monthly and is fixed in advance. Dividends can be declared at any time reserves allow, so the question of which tax year they fall in is yours to decide. A dividend declared on 31 March falls in the year just ending; one declared on 10 April falls in the next. Splitting a large dividend across the two years uses two allowances and two basic bands, and keeps each year's total income below the thresholds that matter.
A worked example
A company with £70,000 of profit before director pay. With a £12,570 salary, employer National Insurance is £1,135.50, leaving £56,294.50 taxable at Corporation Tax; the company is under £50,000 only if that figure is, so here it pays marginal-rate tax of about £11,860, leaving £44,430 for dividends. The director pays no income tax or National Insurance on the salary, and dividend tax of 10.75% on £37,200 of dividends within the basic band after the £500 allowance, plus 35.75% on the £6,730 above £50,270: roughly £6,400. Total take-home is about £50,600 on £70,000 of profit.
With a £5,000 salary instead, there is no employer National Insurance, Corporation Tax is slightly higher because the deduction is smaller, and the first £7,570 of dividends uses the spare personal allowance at 0%. The difference in take-home is a few hundred pounds, usually in favour of the £12,570 salary once the Corporation Tax deduction is counted. Adding a £20,000 employer pension contribution reduces Corporation Tax by £5,000 and moves £20,000 into the pension with no personal tax, which is why directors who can spare the cash do it.
Timing within the year
Salary runs monthly and is fixed in advance. Dividends can be declared at any time reserves allow, so the question of which tax year they fall in is yours to decide. A dividend declared on 31 March falls in the year just ending; one declared on 10 April falls in the next. Splitting a large dividend across the two years uses two allowances and two basic bands, and keeps each year's total income below the thresholds that matter.