Salary vs dividends: the optimal split for 2026/27
Every limited company director in the UK faces the same question: how much to take as salary, and how much as dividends? Get it right and you'll keep thousands more each year. Get it wrong and you're either overpaying tax or storing up problems with HMRC.
Why the split matters
Salary and dividends are taxed completely differently. Salary attracts employer NI (15% above £5,000), employee NI (8% between £12,570 and £50,270, 2% above), and Income Tax (20/40/45%). Dividends attract zero NI on either side, and lower tax rates (8.75/33.75/39.35%).
But salary has advantages too. It's a deductible expense for your company, reducing Corporation Tax. It counts toward your state pension. And it's straightforward for mortgage applications; lenders treat salary income as more reliable than dividends.
The optimal strategy balances these competing factors. For most directors, the answer is a low salary combined with dividends for the rest.
The standard approach: £12,570 salary
Most accountants recommend a salary of £12,570 for 2026/27. Here's why this number works:
- It equals the personal allowance, so zero Income Tax is paid on it
- It's above the NI lower earnings limit (£6,396), giving you a qualifying year for state pension
- Employee NI: £0 (it's at the primary threshold)
- Employer NI: 15% × (£12,570 - £5,000) = £1,136
- Corporation Tax saving: £12,570 + £1,136 = £13,706 × 19% = £2,604 (if small profits rate)
Net cost of the £12,570 salary to your company: £13,706 in expenses, saving £2,604 in CT, so the real cost is £11,102. But you receive £12,570 personally with no tax deducted. That's a positive outcome.
Worked example: £50,000 profit
Your company makes £50,000 profit before your salary. You take £12,570 salary.
| Item | Amount |
|---|---|
| Company profit | £50,000 |
| Salary + employer NI | -£13,706 |
| Taxable profit | £36,294 |
| Corporation Tax (19%) | £6,896 |
| Available for dividends | £29,398 |
You take £29,398 as dividends. Personal tax on dividends:
- £500 at 0% (dividend allowance) = £0
- £28,898 at 8.75% (within basic-rate band) = £2,529
Total personal tax: £2,529. Total take-home: £12,570 + £29,398 - £2,529 = £39,439. Total tax paid across the whole structure: £6,896 (CT) + £1,136 (employer NI) + £2,529 (dividend tax) = £10,561. Effective rate on £50,000 profit: 21.1%.
Compare: if you took the entire £50,000 as salary, you'd pay Income Tax of £7,486, employee NI of £3,007, and your company pays employer NI of £6,750. Total: £17,243. That's 34.5% versus 21.1%. The dividend route saves £6,682 per year.
Worked example: £80,000 profit
Your company makes £80,000. Salary: £12,570. Employer NI: £1,136.
| Item | Amount |
|---|---|
| Taxable profit | £66,294 |
| CT: £50,000 × 19% | £9,500 |
| CT: £16,294 × 26.5% (marginal) | £4,318 |
| Total CT | £13,818 |
| Available for dividends | £52,476 |
You take £50,000 as dividends. Personal tax: £500 allowance at 0%, then £37,200 at 8.75% = £3,255, then £12,300 at 33.75% = £4,151. Total dividend tax: £7,406.
Total take-home: £12,570 + £50,000 - £7,406 = £55,164. Total tax on £80,000: £13,818 + £1,136 + £7,406 = £22,360 (28.0%).
As an employee on the same gross cost (£80,000 + employer NI), total tax would be approximately £27,500. Saving through the dividend route: around £5,140 per year.
Worked example: £120,000 profit
At higher profit levels, more of your dividends fall into the higher-rate band, and the marginal relief zone pushes Corporation Tax up.
| Item | Amount |
|---|---|
| Taxable profit | £106,294 |
| CT: £50,000 × 19% | £9,500 |
| CT: £56,294 × 26.5% | £14,918 |
| Total CT | £24,418 |
| Available for dividends | £81,876 |
You take £80,000 as dividends. Tax: £500 at 0%, £37,200 at 8.75% (£3,255), £42,300 at 33.75% (£14,276). Total dividend tax: £17,531.
Total take-home: £12,570 + £80,000 - £17,531 = £75,039. Total tax: £24,418 + £1,136 + £17,531 = £43,085 (35.9% of £120,000). The savings over pure salary are still significant, but the gap narrows at higher levels because more dividends fall into the 33.75% band.
The employer NI argument
Employer NI is 15% on all earnings above £5,000 with no upper limit. It's the single biggest reason the dividend route is cheaper. On £80,000 of salary, employer NI would be £11,250. On £12,570 salary + £50,000 dividends, employer NI is just £1,136. That's a saving of over £10,000 before you even look at the other tax differences.
From April 2026, the employer NI threshold dropped to £5,000 (from £9,100 in 2024/25). This makes the savings from keeping salary low slightly less dramatic than before, but the principle still holds strongly.
Pension implications
Dividends don't count as "relevant UK earnings" for pension contribution purposes. Your annual allowance for pension contributions is limited to your employment income (salary). If you take £12,570 salary, you can only contribute £12,570 to a pension and receive tax relief.
But company pension contributions are different. Your company can contribute to your pension as an employer contribution, and these don't count against the personal earnings limit. They're a deductible business expense (saving Corporation Tax) and don't trigger employer NI. Many directors use this route to extract profits tax-efficiently above the dividend route.
A company pension contribution of £40,000 (the annual allowance) saves Corporation Tax of £7,600 to £10,000 depending on your rate. And you receive the money in your pension with no immediate personal tax. It's one of the most efficient extraction methods available.
Mortgage applications: the practical problem
Lenders hate the salary-plus-dividends structure. Most high-street banks look at your salary first, and £12,570 doesn't qualify you for much. Some lenders will add dividends to salary, but they'll typically use the lower of your last 2 years' figures, and some will only use dividends declared in the same year (not retained profits).
Specialist contractor mortgage lenders look at your company's net profit or your day rate instead. Halifax, Kensington, and several building societies have specific criteria for director borrowers. If you're planning to buy a house in the next 2 years, consider taking a higher salary (up to the basic-rate limit of £50,270) to improve your lending position. Yes, you'll pay more tax in those years, but the mortgage saving may outweigh it.
The £100,000 trap
Once your total income (salary + dividends) exceeds £100,000, you start losing your personal allowance at a rate of £1 for every £2 over £100,000. Between £100,000 and £125,140, your effective marginal tax rate on dividends is 56.25% (33.75% dividend tax plus the loss of personal allowance).
This means that taking £101,000 in total income costs you significantly more per pound than staying at £100,000. Many directors deliberately keep their salary + dividends at £99,999 and leave excess profits in the company for the following year. Others use pension contributions to bring their adjusted net income below £100,000.
When higher salary is actually better
There are situations where paying more salary makes sense:
- You need mortgage capacity (lenders favour salary)
- You want to maximise personal pension contributions using tax relief
- Your company is making losses (salary creates a loss, reducing future CT)
- You're near state pension age and need more qualifying years
- You're claiming tax credits or benefits that use employment income
The "optimal" split isn't just about minimising tax. It's about minimising tax while achieving your broader financial goals. Use our dividend calculator to model your specific situation and see exactly how different splits affect your take-home pay.