Salary or Dividend? Structuring a Director's Profit Extraction for 2026/27
For most owner-managers of a UK limited company, a small salary combined with dividends remains the standard way to extract profit in 2026/27, because the two are taxed on entirely different tracks. Salary is deductible for corporation tax but attracts National Insurance; dividends come out of post-tax profit and carry none, though the dividend rates rose two percentage points from 6 April 2026. The efficient salary level turns on whether the Employment Allowance is available, and for single-director companies it is a genuine modelling question rather than a fixed rule. This is general information, not advice.
The usual structure, and why it exists
Most owner-managers of a UK limited company draw a modest salary and take the balance of their reward as dividends. The logic is not folklore; it follows from the fact that a salary and a dividend are taxed on entirely different tracks. A salary is a cost of the company, deductible against its profits and subject to National Insurance for both the employee and the employer. A dividend is a distribution of profit the company has already earned and already paid corporation tax on, and it carries no National Insurance at all. For 2026/27 the standard structure remains a small salary topped up with dividends, but the precise figures matter more than they used to, and the arithmetic has shifted since the Autumn 2025 Budget.
Two payments, two tax tracks
Consider the salary first. Because it is deductible, every pound paid as salary reduces the company's taxable profit and saves corporation tax at the company's marginal rate. Against that saving sit two National Insurance charges. The employee pays primary Class 1 contributions at 8% on earnings above the primary threshold of £12,570. The employer pays secondary Class 1 contributions at 15% on earnings above the secondary threshold, which has stood at just £5,000 since 6 April 2025. A dividend behaves quite differently. It can only be paid out of profit that has already suffered corporation tax, so there is no further deduction to be had, but it escapes National Insurance entirely and is taxed on the shareholder at the dividend rates, which remain lower than the effective cost of the equivalent salary.
The personal allowance and the rate bands
The two income types share the same personal allowance and the same rate bands, and that shared framework is where the planning lives. The personal allowance remains frozen at £12,570 for 2026/27, and the higher-rate threshold at £50,270. Salary is taxed first, then dividends sit on top. A separate dividend allowance of £500 taxes the first £500 of dividends at nil, though it uses up part of whichever band it falls in rather than adding to it. Above that allowance, dividends falling in the basic-rate band are taxed at 10.75%, those in the higher-rate band at 35.75%, and those above £125,140 at 39.35%. The first two of those rates rose by two percentage points from 6 April 2026, a change announced at the Autumn 2025 Budget that narrows, without closing, the gap between the dividend route and salary.
The corporation tax backdrop
Dividends are only as cheap as the profit behind them is after tax, so the corporation tax position sets the scene. For 2026/27 the main rate of corporation tax is 25% on profits above £250,000, while the small profits rate is 19% on profits up to £50,000. Between those two limits marginal relief applies, tapering the effective rate upwards through the £50,000 to £250,000 band so that profit at the top of it bears more than the small profits rate at the margin. Both limits are shared among associated companies and reduced for short accounting periods, which can pull a company that feels small into the marginal band. The higher the company's effective corporation tax rate, the more valuable the deduction a salary gives, and the more finely the salary-versus-dividend balance needs to be struck.
The employer National Insurance and Employment Allowance question
The secondary threshold and the Employment Allowance together decide how much a salary really costs the company. The Employment Allowance lets eligible employers offset up to £10,500 of secondary Class 1 National Insurance for 2026/27, and since 6 April 2025 the old restriction to employers whose secondary liability was under £100,000 in the previous year has gone. The catch for owner-managers is a long-standing one. A company cannot claim the allowance where its only employee paid above the secondary threshold is also a director. This single-director exclusion has applied since 6 April 2016, and it means many one-person companies get no shelter for employer National Insurance whatsoever. Where a second employee or director is paid above the threshold, the allowance becomes available for the whole tax year, and the calculation changes materially.
The optimal salary is a model, not a slogan
This is where the much-asked question of the optimal salary has to be answered with arithmetic rather than a rule of thumb. Where the Employment Allowance is available, a salary set at the full personal allowance of £12,570 is usually efficient: it is comfortably deductible, the employer National Insurance it would otherwise trigger is absorbed by the allowance, and the employee pays no primary contributions at or below £12,570. For a single-director company that cannot claim the allowance, there is a genuine trade-off. A salary of £12,570 secures the full corporation tax deduction but generates employer National Insurance at 15% on the £7,570 between the £5,000 secondary threshold and £12,570; a salary pitched at £5,000 avoids that charge but forgoes part of the deduction. Which comes out ahead depends on the company's corporation tax rate and the director's wider income, so it is a figure to model, not a number to recite. One fixed point helps: a salary at or above the Lower Earnings Limit, £6,708 for 2026/27, secures a qualifying year for the state pension even though no contributions are actually paid, so a £5,000 salary can quietly fall short of that protection while a salary at or above £6,708 preserves it.
Where an employer pension contribution completes the picture
An employer pension contribution can round out the structure without becoming its centrepiece. Because a contribution paid by the company directly into the director's pension is normally an allowable expense for corporation tax and carries no National Insurance for either side, it can be a tax-efficient way to move profit into the director's hands for the longer term, subject to the annual allowance and to the contribution meeting the wholly-and-exclusively test. It is not a substitute for salary or dividends but a third lever, and for many owner-managers the sensible plan uses all three in proportion rather than leaning wholly on any one of them. The right blend is specific to the individual, and a contribution large enough to matter is worth checking before it is made.
Common questions
Is it still worth taking dividends now the rates have risen? Generally yes: even at 10.75% and 35.75% the dividend rates sit below the combined income tax and National Insurance cost of the equivalent salary, though the two-point rise from April 2026 has narrowed the advantage, so the right mix should be modelled rather than assumed. Do I have to pay myself a salary at all? No, but a salary at or above the Lower Earnings Limit of £6,708 protects your state pension record and a modest salary preserves the corporation tax deduction, so most directors take at least something. Can I simply pay everything as dividends to avoid National Insurance? You can pay no salary and take only dividends, but you would forgo the corporation tax deduction a salary gives, may lose a qualifying year for the state pension, and can only declare dividends to the extent the company has retained, post-tax distributable profit; dividends taken beyond that create their own tax problems. This article is general information, not advice; the right structure turns on your own figures and should be checked before you act on it.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.