Why pay yourself a salary at all if dividends are taxed less?

Three reasons: (1) salary is deductible against Corporation Tax — every £1 of salary saves 19-26.5p of CT. (2) Salary up to the Lower Earnings Limit gives you a National Insurance credit toward the State Pension — without that you'd need 35 qualifying years of voluntary NI top-ups. (3) Salary builds the 'qualifying earnings' that some lenders and mortgage providers look at.

What's the dividend allowance for 2026/27?

£500. The first £500 of dividends in a tax year are tax-free (you still report them, but no tax is owed). Down from £1,000 in 2023/24 and £2,000 before that.

What are the dividend tax rates?

Basic rate (within Personal Allowance and basic-rate band): 8.75%. Higher rate (between £50,270 and £125,140 total income): 33.75%. Additional rate (above £125,140): 39.35%.

What's the NI Secondary Threshold?

£5,000/year from April 2025 onwards (was £9,100). Employer NI is owed on salary above this threshold. The Employment Allowance offsets up to £10,500 of employer NI per year for eligible employers — but single-director companies can't claim it.

What's the optimum salary level?

It depends on whether you can claim Employment Allowance. Without EA: £5,000/year (just below the Secondary Threshold). With EA: £12,570 (the Personal Allowance) — full salary, no employee NI, no employer NI (because EA covers it). Most single-director companies should stick to £5,000.

Can I pay myself in shares of stock instead?

Yes but the tax treatment is complicated. For most owner-managers a salary + dividend split is simpler and cheaper. Stock-option schemes (EMI, CSOP) are designed for employees, not founders.

What about pension contributions?

Pension contributions paid by the company on your behalf are CT-deductible, free of employer NI, free of income tax, and free of dividend tax. The annual allowance is £60,000 (or £60k tapered down for very high earners). This is often the biggest tax win for high-earning directors.

Do I need a dividend voucher?

Yes, legally. Every dividend payment needs a dividend voucher showing the date, company name, shareholder, and amount paid. Board minutes recording the dividend declaration are also required. BahiKhata generates both automatically when you log a dividend.

Can I just take all the profit as dividends?

Technically yes — there's no minimum salary requirement. But you'd lose State Pension credits and pay slightly more total tax because the salary saves CT. The optimum is rarely 'all dividends'.

What if I have multiple companies?

The Personal Allowance and the dividend allowance are per-person, not per-company. So you can't double-dip. If you draw salary from two companies, you split the Personal Allowance across both via PAYE coding.

Are dividends paid before or after Corporation Tax?

After. Dividends come out of post-tax profits — you can only pay a dividend if there are distributable reserves on the balance sheet. Illegal dividends (paid out of insufficient reserves) can be clawed back personally.

Director Tax Planning

Director salary vs dividends — the 2026/27 optimum split

Updated 17 May 2026

If you own and run a UK Limited Company, the way you pay yourself materially affects how much tax you pay. Here's the 2026/27 framework, with worked examples at £30k, £50k, and £100k of company profit.

2026/27 tax bands at a glance

Personal Allowance: £12,570 (tapered above £100,000 income)
Basic-rate band: £12,571 – £50,270 (income tax 20%, dividend tax 8.75%)
Higher-rate band: £50,271 – £125,140 (income tax 40%, dividend tax 33.75%)
Additional-rate band: above £125,140 (income tax 45%, dividend tax 39.35%)
Dividend allowance: £500/year tax-free
NI Secondary Threshold (employer): £5,000/year
NI Primary Threshold (employee): £12,570/year
Employment Allowance: £10,500/year (most single-director companies don't qualify)

Single-director companies cannot claim Employment Allowance. You need at least one other employee earning above the Secondary Threshold to qualify. This is the single most-misunderstood rule in director tax planning.

The optimum split (single-director Ltd)

For a single-director Ltd that can't claim Employment Allowance:

Salary: £5,000/year (Lower Earnings Limit to keep State Pension credits without triggering employer NI). Paid monthly £416.67.
Dividends: top up to the basic-rate ceiling — £50,270 of total income — leaving £45,270 of dividends.
Above that: pension contributions (most tax-efficient) or higher-rate dividends if you must.

For a multi-employee Ltd that canclaim Employment Allowance: salary £12,570, dividends top-up. The £10,500 EA easily covers the ~£800 of employer NI you'd trigger.

Worked example — £30k of profit

Single director, no EA. Goal: take everything out of the company.

Salary: £5,000 (no employee NI, no employer NI — under £5k Secondary Threshold)
Profit after salary: £25,000 → CT at 19% = £4,750. Distributable reserves: £20,250.
Dividends drawn: £20,250
Personal Allowance used by salary: £5,000 → £7,570 left of PA used against dividends → £12,680 of dividends in the basic-rate band (after £500 allowance).
Dividend tax: 8.75% × £12,180 = £1,066
Take-home: £25,250 — 18.7% total tax

Worked example — £50k of profit

Salary: £5,000
Profit after salary: £45,000 → CT at 19% = £8,550. Distributable reserves: £36,450.
Dividends drawn: £36,450
Basic-rate dividends: £37,770 (band ceiling £50,270 - £5,000 salary - £500 allowance = £44,770). All of the £36,450 fits in basic rate.
Dividend tax: 8.75% × £28,380 (after £500 allowance and remaining £7,570 PA) = £2,483
Take-home: £39,917 — 20.2% total tax

Worked example — £100k of profit

Salary: £5,000
Profit after salary: £95,000 → CT at marginal rate ≈ 23% = £21,850. Reserves: £73,150.
Dividends drawn: £73,150 — pushes into higher-rate band.
£44,770 in basic rate (8.75% on £36,700 after PA + dividend allowance) = £3,211
£28,380 in higher rate (33.75%) = £9,578
Total dividend tax: £12,789
Take-home: £60,361 — 39.6% total tax

At this level, company pension contributions become the biggest win. Diverting £20k of profit into a SIPP saves £5,300 of CT and adds £20k to your pension pot. We model this live in BahiKhata's CFO Insights.

Other considerations

Mortgage applications: lenders look at salary + dividends. A £5k salary can hurt the “income multiplier” calculation — some lenders cap on salary alone.
Maternity / paternity: statutory pay is based on average earnings — a £5k salary cuts you off from most statutory payments. Worth modelling if relevant.
Income protection insurance: usually pays out a % of salary, not dividends. Consider executive-income-protection policies that pay out on total drawings.
Director's loan: you can borrow from the company short-term but if it's >£10k outstanding for >9 months past year-end, you owe S455 tax (33.75% of the balance, refundable when repaid).

Frequently asked

Why pay yourself a salary at all if dividends are taxed less?: Three reasons: (1) salary is deductible against Corporation Tax — every £1 of salary saves 19-26.5p of CT. (2) Salary up to the Lower Earnings Limit gives you a National Insurance credit toward the State Pension — without that you'd need 35 qualifying years of voluntary NI top-ups. (3) Salary builds the 'qualifying earnings' that some lenders and mortgage providers look at.
What's the dividend allowance for 2026/27?: £500. The first £500 of dividends in a tax year are tax-free (you still report them, but no tax is owed). Down from £1,000 in 2023/24 and £2,000 before that.
What are the dividend tax rates?: Basic rate (within Personal Allowance and basic-rate band): 8.75%. Higher rate (between £50,270 and £125,140 total income): 33.75%. Additional rate (above £125,140): 39.35%.
What's the NI Secondary Threshold?: £5,000/year from April 2025 onwards (was £9,100). Employer NI is owed on salary above this threshold. The Employment Allowance offsets up to £10,500 of employer NI per year for eligible employers — but single-director companies can't claim it.
What's the optimum salary level?: It depends on whether you can claim Employment Allowance. Without EA: £5,000/year (just below the Secondary Threshold). With EA: £12,570 (the Personal Allowance) — full salary, no employee NI, no employer NI (because EA covers it). Most single-director companies should stick to £5,000.
Can I pay myself in shares of stock instead?: Yes but the tax treatment is complicated. For most owner-managers a salary + dividend split is simpler and cheaper. Stock-option schemes (EMI, CSOP) are designed for employees, not founders.
What about pension contributions?: Pension contributions paid by the company on your behalf are CT-deductible, free of employer NI, free of income tax, and free of dividend tax. The annual allowance is £60,000 (or £60k tapered down for very high earners). This is often the biggest tax win for high-earning directors.
Do I need a dividend voucher?: Yes, legally. Every dividend payment needs a dividend voucher showing the date, company name, shareholder, and amount paid. Board minutes recording the dividend declaration are also required. BahiKhata generates both automatically when you log a dividend.
Can I just take all the profit as dividends?: Technically yes — there's no minimum salary requirement. But you'd lose State Pension credits and pay slightly more total tax because the salary saves CT. The optimum is rarely 'all dividends'.
What if I have multiple companies?: The Personal Allowance and the dividend allowance are per-person, not per-company. So you can't double-dip. If you draw salary from two companies, you split the Personal Allowance across both via PAYE coding.
Are dividends paid before or after Corporation Tax?: After. Dividends come out of post-tax profits — you can only pay a dividend if there are distributable reserves on the balance sheet. Illegal dividends (paid out of insufficient reserves) can be clawed back personally.