Salary vs dividends: how should a limited company director pay themselves?

Q: Salary vs dividends: how should a limited company director pay themselves?

A limited company director can take salary, dividends or a mix, and neither is better in every case. Salary is normally an allowable cost for Corporation Tax and, from £6,708 a year, protects your National Insurance record, but National Insurance is due above set thresholds. Dividends are paid from profit after Corporation Tax and carry no National Insurance. They are taxed at 10.75%, 35.75% or 39.35% above a £500 allowance in 2026/27.

By Kaiser Khan · Updated 21 October 2026 · 6 sources checked

Salary vs dividends: side by side

Salary compared with Dividends
Feature	Salary	Dividends
Where it comes from	Pay for your work as a director, run through the company payroll	Available profits from current and previous years, paid to shareholders
Deductible for Corporation Tax?	Normally yes, as a cost of paying directors	No. Dividends cannot count as business costs
Employee National Insurance	8% from £12,570 to £50,270, then 2% (2026/27)	None. Dividends are not earnings for National Insurance
Employer National Insurance	15% above £5,000 a year (2026/27)	None
Income Tax rates	20%, 40% or 45% (2026/27). Scottish bands differ	10.75%, 35.75% or 39.35% (2026/27)
Tax-free allowance	Personal Allowance of £12,570 (2026/27)	£500 dividend allowance, plus any unused Personal Allowance
State Pension record	Protected from £6,708 a year, the Lower Earnings Limit (2026/27)	Not built. Dividends do not add to your National Insurance record
Paperwork	Register as an employer; report pay to HMRC in real time	Minutes of a directors' meeting and a dividend voucher each time
When it can be paid	On payday, reported to HMRC on or before payment	When directors declare it, and only from available profits

How is a director's salary taxed?

A director's salary goes through the company payroll, with Income Tax and National Insurance taken off first. For 2026/27, Income Tax is 20%, 40% or 45% above the £12,570 Personal Allowance. Employee National Insurance is 8% from £12,570 to £50,270. The company also pays 15% employer National Insurance above £5,000.

To pay any salary, the company must register as an employer. It reports pay to HMRC in real time, on or before each payment. National Insurance for directors is worked out on annual earnings, not on each pay period, so the yearly thresholds are the ones that count. Above £50,270, employee National Insurance drops to 2%. The same National Insurance rates apply to directors, and the company pays employer National Insurance on their salaries. Salary is normally an allowable cost for the company, so it reduces the profit that Corporation Tax is charged on. Income Tax bands are different if you live in Scotland. Your Personal Allowance also goes down by £1 for every £2 of adjusted net income above £100,000.

How are dividends taxed?

Dividends are paid to shareholders from the company's profits and carry no National Insurance. For 2026/27 there is no tax on dividends covered by your unused Personal Allowance or the £500 dividend allowance. Above that, dividend tax is 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.

A company cannot count dividends as a business cost when it works out its Corporation Tax. So dividends come out of profit that has already been taxed. The company must not pay out more in dividends than its available profits from the current and previous financial years. The company itself does not pay tax on dividend payments. To work out your own tax, add your dividends to your other income, including salary. The band they fall into sets the rate. HMRC's guidance says dividends are not earnings for National Insurance, because you receive them as a shareholder, not as a director. That means they do not add to your National Insurance record. If you receive dividends from your company, you may need to file a Self Assessment tax return.

Which salary thresholds matter in 2026/27?

Three annual figures shape a director's salary for 2026/27. Employer National Insurance starts at £5,000, the Secondary Threshold. A salary of at least £6,708, the Lower Earnings Limit, protects your National Insurance record. Employee National Insurance and Income Tax both start at £12,570, the Primary Threshold and the Personal Allowance.

Between the Lower Earnings Limit and the Primary Threshold you pay no employee National Insurance. Your contributions are still treated as paid, which protects your record. That record is what qualifies you for the State Pension and some benefits. The Employment Allowance can cut a company's employer National Insurance bill by up to £10,500 for 2026/27. But if the company has only one director, that director must not be the only employee liable for employer National Insurance. So a company whose sole director is its only such employee cannot claim it. Whether the allowance applies changes the cost of paying salary above £5,000. That is why there is no single salary figure that suits every company.

What else affects the mix of salary and dividends?

The right mix depends on your company's profits, your other income and your plans. Corporation Tax for the financial year from 1 April 2026 is 19% on profits up to £50,000 and 25% on profits above £250,000, with marginal relief in between. The higher the company's rate, the more Corporation Tax a deductible salary saves.

The £50,000 and £250,000 limits are reduced for short accounting periods and if your company has associated companies. Dividends need available profits, so a new or loss-making company may not be able to pay them. If you take out more than you have put in, and it is not salary or a dividend, it is a director's loan, and you must keep records of it. Your total income matters too. Salary and dividends together decide which Income Tax band you reach, and income above £100,000 starts to reduce your Personal Allowance. Rates and thresholds change, so check the figures for each tax year. An accountant or a salary vs dividends calculator can model the options using your own numbers.