This week’s tax tip is the question we hear most from new company owners: how should I actually pay myself? Salary, dividends or a bit of both — the answer shapes your tax bill every single year. Here’s how the mix works for 2026/27, with real numbers.
Why most owner-directors use a mix
Every pound a director takes must be classified: either pay — salary or a bonus — a company expense, or dividends, your share of the company’s after-tax profits. The two complement each other. Salary is the reliable floor: predictable, deductible for the company, and the route to a National Insurance record. Dividends are the flexible top-up: no National Insurance, but only payable from profits already earned and taxed.
So most owner-directors take a modest salary, then dividends for the rest — the trick is knowing where one should stop and the other begin.
What’s changed for 2026/27
Two things are worth knowing before you set your pay for the year:
- Dividend tax rates went up. From 6 April 2026, dividends above your allowance are taxed at 10.75% for basic-rate taxpayers (up from 8.75%), 35.75% for higher-rate (up from 33.75%) and 39.35% for additional-rate. The dividend allowance itself stays at £500.
- Employer’s National Insurance starts earlier. Companies pay 15% employer’s NI on salaries above the secondary threshold — £5,000 a year in 2026/27, much lower than it once was. Many small companies also qualify for the £10,500 Employment Allowance, which can cover that bill several times over.
Neither change kills the classic structure — the maths still favours it — but both narrow the gap, so it’s worth modelling your own numbers rather than copying last year’s plan.
The salary side: why £12,570 keeps coming up
£12,570 is the personal allowance — and also the primary threshold for employee’s National Insurance. Pay yourself a salary up to that level and, in a simple case, you keep the full amount with no income tax and no employee’s NI.
Above it, employee’s NI kicks in at 8% on top of 20% income tax from your first taxable pound — salary gets expensive quickly. That’s why the classic answer to “what should my salary be?” has long been £12,570 a year, or £1,048 a month.
- Salary must go through payroll: register for PAYE before your first payday and report through RTI, even when nothing is actually due.
- Salary is deductible for the company and builds your National Insurance record, which matters for the State Pension. Dividends do neither.
The dividend side: taxed twice, but gently
Dividends come from profits after Corporation Tax — 19% for a small company with profits of £50,000 or less, the 25% main rate for larger ones, with marginal relief in between.
You then pay personal tax above your £500 allowance, at rates set by your income tax band: 10.75% basic, 35.75% higher and 39.35% additional. “Taxed twice” sounds rough, but for a basic-rate owner-director the combined hit is usually lighter than salary above the primary threshold — and dividends carry no National Insurance at all, for you or the company.
A worked example: £60,000 of profit
Say your company has £60,000 of profit before your pay, and you take a £12,570 salary with the rest as dividends. Rough numbers for 2026/27:
- Salary of £12,570, with employer’s NI of about £1,136 on the portion above the £5,000 secondary threshold.
- That leaves about £46,294 of profit, so Corporation Tax at 19% comes to roughly £8,796.
- About £37,499 is left to pay as dividends.
- Total income of about £50,069 stays inside the basic-rate band, which ends at £50,270 — so dividend tax is 10.75% on the dividends above the £500 allowance, roughly £3,977.
Taken together, around £46,090 of that £60,000 ends up in your pocket. Taken entirely as salary it would be thousands worse off; entirely as dividends, you’d build no National Insurance record at all.
Insight — the example is tidy; real life rarely is. Pension contributions, other income, a spouse on the payroll or unequal shareholdings all move these numbers. Treat £46,090 as an illustration of the method — the method is what’s worth copying.
Keep the paperwork clean
Dividends are only valid when they’re done properly, and “properly” is reassuringly simple:
- Only pay from accumulated, after-tax profits. If a dividend would leave the company unable to pay its debts, it’s illegal — and can be clawed back.
- Declare it: board minutes plus a dividend voucher per shareholder.
- Match payments to shareholdings — dividends follow the shares.
- Keep salary and dividends visibly separate in your bookkeeping.
None of this is onerous with decent bookkeeping — but HMRC takes a close look at directors taking “loans” or drawings that look like undeclared pay.
Quick answers
Can I pay myself only in dividends?
You can, with enough distributable profits — but no National Insurance record builds up (which affects your State Pension), payroll is never registered, and working for no salary can look artificial to HMRC. A modest salary keeps things clean.
What’s the best salary level for 2026/27?
For many owner-directors, £12,570 remains the target — personal allowance and primary threshold used, no income tax or employee’s NI. But employer’s NI now applies above £5,000, so some owners set salary nearer £5,000 and top up with dividends. The winner depends on profits, Employment Allowance eligibility and pension plans.
Do I pay National Insurance on dividends?
No — dividends attract no employee’s or employer’s National Insurance. But they don’t earn NI credits either, which is why some salary matters for your State Pension record.
How much dividend tax will I pay in 2026/27?
The first £500 is covered by the allowance. Above that: 10.75% while your total income stays within the basic-rate band (up to £50,270), 35.75% up to £125,140, and 39.35% beyond. The basic and higher rates both rose this April — check any sums done with last year’s figures.
Do I need to tell HMRC about my dividends?
If your dividends exceed your allowances, report them on your Self Assessment return — declare the full amounts. Your company keeps the vouchers and minutes and records the dividends in its accounts.
Get your pay mix right, once
Your salary and dividend policy isn’t a January decision — it’s a set-it-properly-once decision that pays you back every month. A Taxora accountant can run your payroll, handle the dividend paperwork and revisit your pay mix as profits change — all for a fixed monthly fee from £9.99, with a dedicated personal accountant and unlimited support.
Book a free chat with Taxora or browse our services and pricing — and pay yourself properly, every year.
This article is general information for UK limited company owners and isn’t financial, legal or tax advice. Rates and rules change — speak to a qualified accountant about your circumstances before acting.