Last updated: 18 October 2026
What is the most tax-efficient way for company directors to pay themselves: salary vs dividends? If you run a limited company, there are three main ways to take money out: salary, dividends and employer pension contributions. This guide compares them using the 2026/27 tax rates.
We look at the tax advantages of dividends and pension contributions, and the limits of each type of payment.
- How do I take a payment from my company? – salary vs dividends
- Taking a salary from your company
- Taking dividends as pay
- Advantages and disadvantages
How Could I Make a Payment from my Organisation?
Most directors of limited companies pay themselves a mix of salary and dividends, often topped up with employer pension contributions. The right mix for you depends on several factors, such as:
- The company’s profits, and whether it wants to fund a pension for you.
- How much you want to reduce your personal tax bill, and which business expenses the company already pays.
- How much you want to reduce the company’s Corporation Tax bill.
- Whether you want to protect state benefits, such as the State Pension and Statutory Maternity Pay.
Taking a Salary from your Organisation
As a director, it is usually sensible to take at least a small salary through the company’s payroll. There are several advantages to taking part of your pay as salary.
The Advantages of Taking a Salary:
- You build up qualifying years towards your State Pension
- You can make larger personal pension contributions, because they are limited to your earnings
- You can protect your entitlement to some benefits, such as Statutory Maternity Pay
- It can be easier to get a mortgage or insurance, such as critical illness cover
- You reduce the Corporation Tax your company pays, because salary is a tax-deductible business expense
There are, however, some downsides to taking a salary, especially a large one.
The Downsides of taking a Salary
Above the personal allowance, salary is taxed at higher income tax rates than dividends, and it also attracts employee’s National Insurance at 8% and employer’s National Insurance at 15%. A dividend comes out of the company’s after-tax profit but has no National Insurance at all.
Choosing How Much Salary to Take:
You pay no income tax on salary up to your personal allowance, which is £12,570 for 2026/27. You only pay NICs as an employee if your pay goes over the primary threshold, which is also £12,570 a year (£1,048 a month). But your company pays employer’s National Insurance at 15% on salary above £5,000 a year, unless it can claim the £10,500 Employment Allowance.
To build up qualifying years for the State Pension, your salary must be at least the lower earnings limit of £6,708 a year (£559 a month) for 2026/27.
As a general guide, many directors take a salary of £12,570 for 2026/27. Even where employer’s National Insurance is due, the salary and the National Insurance both save Corporation Tax at the company’s Corporation Tax rates of 19% to 25%. Some single-director companies choose a lower salary, between £5,000 and £6,708, to keep employer’s National Insurance down while protecting the State Pension. The best level depends on your circumstances, so it is worth asking your accountant to run the numbers.
Accepting Dividends As Pay
Many directors take most of their income as dividends, because this is usually more tax-efficient.
What Are Dividends?
A dividend is a share of the company’s profits. Dividends can only be paid out of retained profits, meaning what is left after the company has paid all its costs and liabilities, including Corporation Tax.
Dividends are paid to shareholders in proportion to the shares they hold. A company can keep profits over several years and distribute them when the directors decide.
The Advantages of Taking Dividends
- Dividends are taxed at lower rates than salary and have no National Insurance.
- Taking most of your income as dividends can significantly reduce your overall tax bill.
Your Dividend Allowance:
Everyone has a £500 tax-free dividend allowance for 2026/27, on top of the personal allowance. So if dividends were your only income, you could receive £13,070 before paying any income tax.
Income Tax Rates on Dividends:
For 2026/27, dividends above your allowances are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. The basic and higher rates both rose by 2 percentage points from 6 April 2026.
Example:
Jane takes a salary of £12,570, which uses her personal allowance. Her company has a further £37,037 of profit that she wants to take out in 2026/27. Her company pays Corporation Tax at 19%.
Option 1: dividends. The company pays Corporation Tax of £7,037, leaving £30,000 to pay as a dividend. The first £500 is covered by her dividend allowance and the remaining £29,500 is taxed at 10.75%, so Jane pays £3,171 in dividend tax and keeps £26,829.
Option 2: extra salary. The company uses the £37,037 to pay Jane an extra salary of £32,206 plus employer’s National Insurance of £4,831 (assuming no Employment Allowance). Jane pays income tax of £6,441 and employee’s National Insurance of £2,576, so she keeps £23,189.
Taking dividends leaves Jane about £3,640 better off.
The Third Option: Employer Pension Contributions
Employer pension contributions are deductible for Corporation Tax, have no income tax or National Insurance, and are not limited by your salary, only by the £60,000 annual allowance (less for very high earners). They are often the most tax-efficient way to extract profits you do not need straight away.
The Disadvantages of Taking Dividends:
Although taking most of your pay as dividends may seem an easy decision, there are limits and traps to watch out for.
- Dividends can only be paid out of retained profits.
- Relying heavily on dividends can make your income irregular.
- Dividends are paid after Corporation Tax has been deducted, unlike salary, which is a tax-deductible cost.
- If you take a dividend that is not covered by profits, it is an illegal dividend and may have to be repaid or treated as a director’s loan.
- Dividends do not count as ‘relevant UK earnings’ for tax relief on personal pension contributions you make yourself.
Conclusion:
To sum up salary vs dividends for 2026/27: a modest salary plus dividends, topped up with employer pension contributions, is still a tax-efficient approach for many directors, although the gap has narrowed after the dividend tax rises. The right mix depends on your own circumstances. If you rely on dividends for most of your income, make sure you have good bookkeeping in place so that you know your profits and can document every dividend properly.
Your bookkeeper or accountant can also work out the most tax-efficient mix for you and your company, which can be complicated. We hope this guide helps you understand salary vs dividends.
Disclaimer: All the information in this article on salary vs dividends for 2026/27, including text and graphics, is general in nature and does not replace professional advice.
