Salary or Dividends: How Company Directors Are Taxed in 2026/27
The dividend tax rates moved for 2026/27, which changes the arithmetic for owner managed companies. Here is how salary and dividends are each taxed, and what to check before you fix your split.
If you run your own limited company you can take money out as salary, as dividends, or as a mixture of both, and the tax treatment is very different. Salary is a company expense that reduces corporation tax but attracts National Insurance. Dividends carry no National Insurance but come out of profit that has already been taxed. The dividend tax rates changed for 2026/27, so a split that worked last year may not be the best answer now.
The short version
Dividend tax rates rose for 2026/27 to 10.75 per cent at the basic rate and 35.75 per cent at the higher rate, with the additional rate at 39.35 per cent.
The dividend allowance is £500, so only dividend income above that is taxed.
Employer National Insurance is 15 per cent, and it starts at a secondary threshold of £96 a week.
Dividends can only be paid from profit, so a company without retained profit cannot legally declare them.
There is no single correct split. It depends on your profit, your other income and whether you need qualifying years for the state pension.
How is a director’s salary taxed?
A salary is treated like any other employee’s pay. It goes through PAYE, income tax is deducted at your marginal rate, and both you and the company may pay National Insurance on it. Crucially, salary is an allowable expense for the company, so every pound of gross pay reduces the profit subject to corporation tax.
The National Insurance thresholds are where the detail sits. For 2026/27 employees start paying Class 1 National Insurance at 8 per cent on weekly earnings above £242, dropping to 2 per cent above £967. Employers pay 15 per cent on earnings above a secondary threshold of £96 a week, and the GOV.UK National Insurance rates and categories page sets out the full bands. There is also a lower earnings limit of £129 a week, and earning at or above it is what protects your entitlement to certain state benefits.
That lower earnings limit matters more than the tax saving for many directors. Taking a salary at or above it gives you a qualifying year towards the state pension even where no National Insurance is actually payable, which is a genuine reason not to take a purely dividend based income. Getting the payroll right for this is part of what our payroll service handles for director run companies across Cheshire.
How are dividends taxed in 2026/27?
Dividends are a distribution of profit after corporation tax, so the company gets no deduction for paying them. In exchange, there is no National Insurance on dividend income for either the company or the director. You get a dividend allowance of £500 each year, and anything above that is taxed at rates that depend on which income tax band the dividend falls into once added to your other income.
| Income tax band | Dividend tax rate 2026/27 |
| Basic rate | 10.75 per cent |
| Higher rate | 35.75 per cent |
| Additional rate | 39.35 per cent |
Rates apply to dividend income above the £500 dividend allowance. Source: GOV.UK guidance on tax on dividends.
The basic and higher rates are noticeably higher than they were, and that shift is the single most important reason to revisit your position this year. The GOV.UK guidance on tax on dividends confirms the current rates and explains how the bands are worked out. Dividends sit on top of your other income when deciding which band applies, so salary, rental profit and pension income all push your dividends further up the scale.
Dividends are not a substitute for a salary you cannot afford. They can only be paid out of distributable profit. If the company declares a dividend when the retained profit is not there, it is unlawful and may be reclassified, which can leave you with a director’s loan and an unexpected tax charge.
Why the mix matters more than either option alone
Because salary and dividends are taxed on completely different bases, the total tax on the same amount of money out of the company varies with how you split it. A modest salary keeps the corporation tax deduction and the National Insurance record while staying inside the thresholds. Dividends then take the rest without adding National Insurance on top.
What has changed is the balance. With employer National Insurance at 15 per cent starting at a relatively low threshold, and dividend rates higher than in previous years, the arithmetic is genuinely closer than it used to be. Employment allowance, if your company qualifies, changes it again. This is exactly the kind of calculation our taxation team runs for each client rather than applying a rule of thumb.
What to check before you set your split for the year
1Confirm the company actually has profit
Dividends need distributable reserves. Check the position from the accounts, not the bank balance, because money in the account may be owed elsewhere.
2Add up all your other income
Rental income, a pension, or a salary from another job all affect which band your dividends land in.
3Decide whether you need a qualifying year
If you want the state pension credit, the salary has to be at or above the lower earnings limit.
4Check whether employment allowance applies
Some director only companies cannot claim it, which changes the employer National Insurance calculation entirely.
5Document every dividend properly
Board minutes and a dividend voucher for each payment. Without them, HMRC can argue the payment was something else.
Mistakes that cause real problems
Taking money out through the year and deciding afterwards whether it was salary or a dividend. The paperwork has to come first.
Declaring dividends with no distributable profit, which turns the payment into a director’s loan.
Forgetting that dividends stack on top of other income, so a modest dividend can be taxed at the higher rate.
Assuming last year’s split is still optimal after the dividend rate change.
Setting a salary just below the lower earnings limit and losing a qualifying year for the sake of a very small saving.
Overlooking the corporation tax angle. Salary reduces company profit, dividends do not.
Frequently Asked Questions
Is it still better to take dividends than salary?
Usually a mixture works out best, but the gap has narrowed because dividend rates increased for 2026/27. The right answer depends on your profit level, your other income and whether your company can claim employment allowance. There is no universal split, so speak to us for advice tailored to your situation.
Do I pay National Insurance on dividends?
No. Dividend income does not attract National Insurance for you or for the company. That is the main structural advantage of dividends over salary, and it is why a purely salary based income is rarely the most efficient route for an owner managed company.
What is the dividend allowance for 2026/27?
It is £500. Dividend income within the allowance is not taxed, and only the excess is charged at the dividend rates. The allowance does not reduce your other income or your personal allowance, it simply exempts the first £500 of dividends.
Can I pay a dividend if the company made a loss this year?
Possibly, if there are retained profits from earlier years still available to distribute. A loss in the current year does not automatically block a dividend, but you must check accumulated reserves rather than this year’s figure alone. Get the accounts checked before declaring anything.
Why does the lower earnings limit matter if no National Insurance is due?
Because earning at or above it in a tax year gives you a qualifying year towards the state pension and certain contributory benefits, even though no contributions are actually deducted. Many directors set salary with this in mind rather than purely for tax reasons.
Do I need to file a Self Assessment return for dividends?
If your dividends exceed your unused personal allowance and your dividend allowance, you need to report them to HMRC, and most director shareholders will be filing a return anyway. We handle these returns for company directors across Widnes as a matter of routine.
Can FD Accountants review our current arrangement?
Yes. We look at the company profit, each director’s other income and the National Insurance position, then set out the options clearly so you can decide. Get in touch for a free initial consultation and we will tell you honestly whether a change is worth making.
Reviewing your position for the current year
Salary and dividend planning is one of those jobs that is easy to leave until the accounts are being prepared, by which point the year is already set. With the dividend rates having moved, this is a genuinely useful year to look at it early. If you would like us to work through your figures, get in touch with FD Accountants and we will explain where you stand without the jargon.
Straightforward Accounting. Real Support.
We look after limited company directors across Widnes, from payroll and dividends to the annual accounts and everything in between.