If you run your own limited company, you decide how to take money out of it. Most directors take a small salary and the rest as dividends, but the best mix depends on your company and your other income. Dividend tax went up on 6 April 2026, so it is worth checking your plan for this year.
The 2026/27 figures at a glance
| Figure for 2026/27 | Amount |
|---|---|
| Personal allowance (income tax free) | £12,570 |
| National Insurance lower earnings limit (counts towards the State Pension) | £6,708 a year |
| Employer National Insurance starts (secondary threshold) | £5,000 a year, at 15% |
| Employee National Insurance starts (primary threshold) | £12,570 a year, at 8% (2% above £50,270) |
| Employment Allowance (reduces employer National Insurance) | up to £10,500 |
| Dividend allowance | £500 |
| Dividend tax: basic rate | 10.75% (was 8.75%) |
| Dividend tax: higher rate | 35.75% (was 33.75%) |
| Dividend tax: additional rate | 39.35% (unchanged) |
| Corporation Tax | 19% on profits up to £50,000; 25% over £250,000; marginal relief in between |
Salary: what level?
A salary is an expense of the company, so it reduces Corporation Tax. It also counts towards your State Pension once it reaches the lower earnings limit (£6,708). The common choices are:
- Around £6,708: enough to count towards your State Pension. The company pays a little employer National Insurance on the part above £5,000, unless it can claim the Employment Allowance.
- £12,570: uses your whole personal allowance with no income tax and no employee National Insurance. It is often the better choice when the company can claim the Employment Allowance, which covers the employer National Insurance.
One catch: a company whose only director is also the only employee paid above £5,000 cannot claim the Employment Allowance. For many one-person companies, that changes the sums, and the best salary depends on the company’s Corporation Tax rate. This is worth working out properly each year.
Dividends: how they are taxed
Dividends are paid out of the company’s profits after Corporation Tax, so they do not reduce the company’s tax bill. For you, the first £500 is tax-free, and the rest is taxed at 10.75%, 35.75% or 39.35%, depending on which tax band it falls in once your salary and other income are added.
Worked example (2026/27): Ben takes a salary of £12,570 and dividends of £30,000, and has no other income.
- His salary uses his personal allowance, so there is no income tax on it.
- The first £500 of dividends is covered by the dividend allowance.
- The remaining £29,500 falls in the basic rate band, taxed at 10.75%: £3,171.25.
- At last year’s rate of 8.75% the same dividends would have cost £2,581.25, so the change costs Ben £590 a year.
Things to get right
- Dividends need profits. A company can only pay dividends from profits it has made and kept (after tax). Money taken without enough profits is not a dividend and can become an overdrawn director’s loan, with its own tax charges.
- Keep the paperwork. Each dividend needs a board decision (minutes) and a dividend voucher, and is paid in line with shareholdings.
- Do not forget your other income. Rent, a job or savings interest can push dividends into the higher rate.
- Consider pension contributions. Contributions paid by the company into your pension are usually a business expense and are free of National Insurance. They can be an efficient alternative to extra dividends.
- Self Assessment. Dividends above the £500 allowance usually mean a tax return, with tax due by 31 January after the end of the tax year.
How we help
For our limited company clients we work out the salary and dividend mix each year, run the director’s payroll, prepare the dividend paperwork and file the personal tax return. If you would like us to look at your figures for 2026/27, request a call back.
Sources
- GOV.UK: Rates and thresholds for employers 2026 to 2027
- GOV.UK: Tax on dividends
- GOV.UK: Employment Allowance: eligibility
- GOV.UK: Corporation Tax rates