Salary vs Dividends: How UK Limited Company Directors Should Pay Themselves in 2026/27

If you run your own limited company, one of the first questions that comes up is simple to ask and surprisingly fiddly to answer properly: should you pay yourself a salary, take dividends, or some mix of both? The answer matters, a few thousand pounds a year in the wrong structure adds up fast, but the maths behind it involves three separate tax systems working together: Income Tax, National Insurance, and Corporation Tax. Here's how each one behaves, and how to work out roughly where you land.

What is the salary/dividend split?

As a director of your own limited company, you're both an employee and a shareholder. That means you can pay yourself in two different ways: a salary through PAYE, taxed like any other employment income, or dividends, which are a share of the company's after-tax profit paid out to shareholders. Most directors of small companies use a combination of both, a modest salary plus dividends topping up the rest, rather than putting all their income through one route.

Why directors use this strategy

The short version: dividends aren't subject to National Insurance, salary is. Employees pay Class 1 National Insurance on salary above the Primary Threshold, and employers pay a separate Class 1 charge on top. Dividends sidestep both of those, though they're paid from profit that's already had Corporation Tax deducted, so the saving isn't as large as it first looks. Even so, for most director-shareholders, a salary and dividend mix usually works out more tax efficient than an all-salary approach, provided your company is genuinely profitable enough to support it.

How salary is taxed

Salary you pay yourself through PAYE is taxed exactly like any other employee's pay. For 2026/27, the Personal Allowance is £12,570, meaning you pay no Income Tax on earnings up to that point (assuming you haven't lost any of it to the high-income tapering that applies above £100,000). Above the Personal Allowance, the basic rate of 20% applies up to £50,270, then 40% up to £125,140, then 45% above that. On top of Income Tax, employees pay 8% Class 1 National Insurance on earnings between £242 and £967 a week, and 2% above that. Your company also pays employer National Insurance at 15% on salary above the Secondary Threshold of £96 a week, a real cost to the business, not something deducted from your pay, but one that affects how much the company can afford to pay you overall.

How dividends are taxed

Dividends are paid from your company's profit after Corporation Tax has already been deducted, so in a sense they've already been taxed once before they reach you. On top of that, you pay dividend tax on anything above your £500 tax-free dividend allowance, at a rate that depends on your total income for the year.

Crucially, there's no National Insurance on dividends at all, for you or the company. That's the main reason the salary/dividend split exists as a strategy in the first place.

Worked example: £10,000 either way

To see the difference in practice, compare what happens if your company pays you an extra £10,000 as salary versus as a dividend. This example looks only at the personal tax you'd pay on money reaching you directly, assuming you're already a basic rate taxpayer and have used your dividend allowance elsewhere; it doesn't fold in employer National Insurance or the Corporation Tax already paid on profit before it can be distributed, both of which are real costs but sit on the company's side of the equation, not yours.

In this basic rate example, the dividend route leaves roughly £1,725 more in your pocket per £10,000. Your company would also pay an extra £1,500 in employer National Insurance to deliver £10,000 as salary, a further cost that doesn't apply to dividends, though salary and employer National Insurance both reduce the company's taxable profit, while dividends are paid after Corporation Tax has already been charged. The full picture depends on your company's profit level and your own tax band, which is exactly what our Dividend vs Salary Calculator works out for your own numbers.

The small salary approach

Rather than choosing one extreme, most directors of small companies pay themselves a salary around the National Insurance Secondary Threshold, high enough to count as a qualifying year for the State Pension, but low enough that employer National Insurance stays at zero. Above that, they top up their income with dividends. This isn't a loophole, it's a standard, widely used structure that HMRC's own guidance acknowledges, provided the dividends genuinely reflect distributable company profit and the correct paperwork (board minutes and dividend vouchers) is kept for each payment.

Common mistakes

• Declaring dividends the company can't actually afford. Dividends can only be paid from distributable profit. Paying one when the company doesn't have enough retained profit can create an illegal dividend, which HMRC and company law both treat seriously.
• Forgetting Corporation Tax comes first. Dividends come from profit after Corporation Tax, currently 19% for profits up to £50,000 and 25% above £250,000, with marginal relief in between (see our Corporation Tax guide for how marginal relief is worked out). Our Corporation Tax Calculator can help you check how much your company owes before working out what's left to distribute.
• Not keeping paperwork. Every dividend needs a board minute and a dividend voucher showing the date, amount and shareholder, even in a one-person company. Skipping this is one of the most common issues HMRC flags on enquiry.
• Ignoring the wider picture. A salary counts towards pension contributions, mortgage affordability assessments and statutory pay entitlements in a way dividends don't always. The most tax-efficient split on paper isn't automatically the right one for your personal circumstances.

For the tax side of the sole trader alternative to a limited company, see our UK self-employed tax guide, and check your own take-home either way with the Take-Home Pay Calculator or the Income Tax Calculator.

Frequently asked questions