A UK company director can be paid a salary, receive dividends as a shareholder, or use both. The right split is not a fixed number. It depends on the company’s available profits, the director’s other income, payroll costs, pension and benefit goals, and whether the company qualifies for Employment Allowance.

For the 2026/27 tax year, a salary and a dividend still travel through different systems. Salary is employment income run through PAYE. A dividend is a distribution of after-Corporation-Tax profit to shareholders. That distinction matters more than a headline comparison of personal tax rates.

Salary and dividends are not interchangeable

A salary is payment for work. The company registers as an employer, reports the pay through payroll and deducts Income Tax and employee National Insurance where due. Salary is normally an allowable business cost when calculating taxable company profit, provided it is incurred wholly and exclusively for the trade.

A dividend is a return to a shareholder. It is not a business expense and does not reduce the company’s Corporation Tax bill. The company can pay it only from available profits and must follow the formal dividend process.

That produces the first practical test:

Question Salary Dividend
Must the recipient be a shareholder? No Yes
Goes through payroll? Yes No
Usually reduces taxable company profit? Yes No
Needs available distributable profit? No Yes
Attracts National Insurance? It can No
Creates an employment earnings record? Yes No

For a director who is not also a shareholder, dividends are not an option. For a shareholder-director, they remain optional: the company does not have to pay all available cash out.

The 2026/27 payroll thresholds

HMRC’s employer tables for 6 April 2026 to 5 April 2027 set the standard Personal Allowance and employee National Insurance primary threshold at £12,570 a year. The employer’s secondary threshold is lower, at £5,000 a year.

For a standard category A employee:

  • employee National Insurance is 8% between the primary threshold and upper earnings limit, then 2% above it;
  • employer National Insurance is generally 15% above the secondary threshold;
  • the lower earnings limit is £6,708 a year.

Directors use an annual earnings period for National Insurance, even when payroll is run monthly. HMRC allows a standard annual method and an alternative method for regular payments, with an annual reconciliation.

The lower employer threshold means a salary can produce an employer National Insurance bill even when the director pays no employee National Insurance. A salary of £12,570, for example, sits at the standard employee threshold but is £7,570 above the employer threshold. Before any reliefs, the employer contribution on that excess would be £1,135.50:

(£12,570 − £5,000) × 15% = £1,135.50

This is an illustration for a full tax year and a standard category A director. Appointment part-way through the year, another National Insurance category, multiple employments or changes in status can alter the result.

Employment Allowance can change the company cost

Employment Allowance can reduce eligible employers’ Class 1 National Insurance bill, but a common small-company exclusion matters.

HMRC says a limited company cannot claim the allowance when it has one director and that director is the only employee for whom the company has a secondary Class 1 liability. Merely putting another person on payroll below the relevant threshold does not necessarily fix that: HMRC’s test looks at whether an additional employee or director is paid above the secondary threshold.

This is why two otherwise similar companies can reach different salary decisions. One may have employees and use Employment Allowance against its employer contributions; another may be a one-person company and pay the employer charge itself.

Check eligibility for the whole company before comparing salary with dividends. Do not copy a “best director salary” figure from a business with a different workforce.

Dividend tax for 2026/27

The dividend allowance remains £500 for 2026/27. It is a zero-rate band, not an extra deduction from company profit. Dividend income above the allowance is taxed according to the shareholder’s Income Tax band.

HMRC lists the 2026/27 dividend rates as:

  • 10.75% in the basic-rate band;
  • 35.75% in the higher-rate band;
  • 39.35% in the additional-rate band.

To find the band, dividend income is added to the person’s other income. A director with employment income, rent, savings interest or dividends from another company needs to consider the total, not this company’s dividend in isolation.

Dividends do not attract employee or employer National Insurance. That does not make them “tax free”: the company has already earned the profit within the Corporation Tax system, and the shareholder may then owe dividend tax.

Profit comes before cash

A healthy bank balance is not enough to support a dividend. GOV.UK says the company must not pay out more than the profits available from current and previous financial years.

Start with current accounts or reliable management figures. Adjust for Corporation Tax and any earlier distributions. Then keep enough cash for VAT, PAYE, suppliers, loan payments and near-term operating costs.

The legal profit test and the cash test answer different questions:

  • Available profit: may the company lawfully declare the dividend?
  • Available cash: can it pay the dividend without creating a cash shortage?

Our guide to cash versus accrual accounting explains why cash received and accounting profit can diverge. The cash runway calculator can help test the second question, but it cannot prove that distributable reserves exist.

The paperwork is part of the decision

Salary requires payroll. The company reports the director’s pay and deductions in a Full Payment Submission. For National Insurance, the FPS also identifies the director calculation method.

Each dividend needs:

  1. enough available profit;
  2. a directors’ decision declaring the dividend;
  3. minutes of that decision, even for a sole director;
  4. a dividend voucher recording the date, company, shareholder and amount;
  5. payment in line with the rights attached to the shares.

GOV.UK notes that dividends must usually be paid to all shareholders. Different share classes can carry different rights, but the company must follow its articles and the terms of those shares rather than inventing a different split at payment time.

If a payment is labelled a dividend without sufficient profit or proper authority, the label does not make it lawful. The Insolvency Service warns that unsupported dividends may have to be repaid and can have serious consequences if the company later becomes insolvent.

A sensible sequence for deciding the mix

Use a sequence rather than starting with a tax target.

1. Set the director’s regular cash need

Work out the personal amount needed each month. Separate essentials from irregular drawings. A steady salary can make budgeting and evidence of earnings easier, while dividends can follow actual profit.

2. Check payroll and National Insurance

Model the salary using current payroll software. Confirm the director’s National Insurance category, appointment date, other employments and the company’s Employment Allowance position.

3. Preserve company obligations

Ring-fence Corporation Tax, VAT, PAYE and committed operating costs. Do not treat money held for a tax bill as dividend capacity.

4. Confirm distributable reserves

Use up-to-date accounts. If the last annual accounts are old or the current year contains losses, ask the accountant whether interim accounts are needed before declaring a dividend.

5. Add the shareholder’s other income

Estimate which tax bands the dividend will occupy after salary and other income. The same dividend can be taxed at more than one rate if it crosses a band boundary.

6. Record each payment correctly

Run salary through payroll. Prepare dividend minutes and vouchers when a dividend is declared. If money is taken before either route is established, record it accurately: it may be a director’s loan, not a retrospective dividend.

When salary may matter beyond this year’s tax

Tax is only one effect of salary. A salary can support a National Insurance record, workplace pension contributions, mortgage or tenancy evidence and some employment-related benefits. The exact result depends on earnings and personal circumstances.

Dividends do not create earnings for National Insurance purposes and are not pensionable salary. Someone who chooses a very low salary should check their National Insurance record rather than assuming the year will count.

The company also needs to consider what it can sustain. A higher fixed salary is due even in a weak month; a dividend can be withheld when profit is unavailable. That flexibility is useful, but it is not a substitute for formal records.

Common mistakes

Using the company bank balance as the dividend limit. Cash can include VAT, tax reserves, customer deposits or borrowed money.

Ignoring employer National Insurance. The secondary threshold is much lower than the employee primary threshold in 2026/27.

Assuming every one-director company gets Employment Allowance. HMRC specifically excludes many cases where the director is the only employee creating a secondary contribution liability.

Declaring dividends after the money has gone. Minutes and vouchers should document a real decision supported by profit, not repair an unexplained withdrawal months later.

Copying an annual “optimum salary.” The answer can change with other income, Scotland’s income-tax bands, benefits, pensions, student loans, other employees and part-year directorships.

The practical answer

For many profitable owner-managed companies, a mix of salary and dividends remains possible in 2026/27. The salary establishes employment pay and can reduce company profit; dividends distribute what remains after Corporation Tax. The mix must be tested against employer National Insurance, Employment Allowance eligibility, the shareholder’s full income and the company’s actual reserves.

Run the numbers twice: once for the company and once for the shareholder. Then keep payroll and dividend records that match what the company actually paid.

Questions directors ask

Can a director take dividends instead of any salary?

Only a shareholder can receive dividends, and the company needs enough distributable profit. Taking no salary can also affect the person’s National Insurance record and other evidence of earnings, so it is not purely a tax-rate choice.

Does a dividend reduce Corporation Tax?

No. A dividend is paid from profit after Corporation Tax and is not deducted as a business expense.

Does a salary of £12,570 avoid all National Insurance in 2026/27?

It is at the standard employee primary threshold for a full year, but the employer secondary threshold is £5,000. The company may therefore owe employer National Insurance unless a relief such as Employment Allowance applies.

Can a sole-director company claim Employment Allowance?

Often not. HMRC excludes a limited company where one director is the only employee generating a secondary Class 1 liability. Eligibility can change if another employee or director is paid above the relevant threshold.

How often can a company pay dividends?

Dividends can be declared during the year whenever the company has sufficient available profit and follows the required decision and voucher process. They do not need to follow the payroll cycle.

Official sources

Rates and guidance checked 15 October 2026. This is a general guide, not personal tax or legal advice.