As a limited company director, you have flexibility in how you extract profits: salary, dividends, pension contributions, or a combination. The right split can save thousands in tax compared to taking everything as salary. This guide covers the optimal approach for 2026/27.
Why not just pay yourself a salary?
Salary attracts both employee NI (8% on earnings between £12,576 and £50,268, 2% above) and employer NI (13.8% above £9,100). A £50,000 salary costs the company approximately £55,600 when you include employer NI — and the employee keeps only around £38,500 after tax and NI.
Dividends, by contrast, do not attract National Insurance. Although they are paid from post-Corporation-Tax profits (25% CT rate), the combined tax burden is usually lower than the salary route for most profit levels.
The optimal salary for 2026/27
Most accountants recommend a salary at or just below the NI Primary Threshold (£12,576/year for 2026/27). At this level:
- No employee NI is triggered
- No employer NI is triggered (threshold is £9,100, but the Employment Allowance of £10,500 covers it if you have no other employees)
- The salary counts as a qualifying year for State Pension
- The salary is a deductible expense for Corporation Tax
If you do not qualify for the Employment Allowance (e.g. you are a sole-director company with no other employees), a salary of £9,100 avoids employer NI entirely but may not be a qualifying NI year.
Taking the rest as dividends
After your salary, remaining profits are subject to Corporation Tax (25%). The post-tax profit can then be distributed as dividends:
- First £500: tax-free (Dividend Allowance)
- Within basic rate band: 8.75%
- Within higher rate band: 33.75%
- Additional rate: 39.35%
Worked example: £80,000 company profit
Salary: £12,576 (no NI). Remaining profit: £67,424. Corporation Tax (25%): £16,856. Available for dividends: £50,568.
Dividend tax: £500 at 0%, £37,194 at 8.75% (using remaining basic band), £12,874 at 33.75% = total dividend tax ~£6,621.
Total tax paid (CT + dividend tax + income tax on salary): ≈ £23,477. Effective rate: ~29.3%. Compare this to £80,000 as salary: ≈ £28,400 in tax + NI (employee) + £9,800 employer NI = 47.8% total cost.
Pension contributions as a third lever
Employer pension contributions are deductible for Corporation Tax and do not attract NI. Many directors make employer contributions of up to £60,000/year (the Annual Allowance) to reduce their CT bill while building retirement savings tax-efficiently.
Model your split
Use the dividend tax calculator to see how different salary/dividend combinations affect your personal tax, or the main calculator to see your overall take-home position.