Salary vs dividends: the best way to pay yourself as a limited company director (2026-27)

Short answer: for 2026-27 most one-director UK companies with profits of £20,000 or more are best off paying a salary of £12,570 (the personal allowance) through payroll and taking the rest of what they need as dividends. A salary up to £12,570 has no income tax or employee National Insurance. The company pays 15% employer National Insurance on everything above £5,000, but salary and that National Insurance both cut corporation tax, so £12,570 still leaves the director a few hundred pounds a year better off than £5,000. If the company can claim the Employment Allowance (it has another employee paid above £5,000), the employer National Insurance is covered and £12,570 is clearly best. A lower salary of £5,000 or £6,708 is the better choice when the company has little profit, or when the director’s personal allowance is already used by a job or a pension. Above £12,570, every extra pound is better taken as a dividend. A worked example is below.

This guide covers UK limited companies in the 2026-27 tax year (6 April 2026 to 5 April 2027). Sole traders and partners pay income tax on their profit whatever they take out, so this choice does not exist for them: see owner drawings in Xero.

The 2026-27 numbers that decide it

Threshold	2026-27	What happens there
Secondary threshold	£5,000 a year	The company starts paying employer National Insurance at 15%
Lower earnings limit	£6,708 a year	Salary from here counts towards your state pension, with no National Insurance to pay
Personal allowance and primary threshold	£12,570 a year	You start paying income tax (20%) and employee National Insurance (8%)
Dividend allowance	£500	The first £500 of dividends above your personal allowance is tax-free
Dividend tax	10.75% / 35.75% / 39.35%	Basic, higher and additional rate, above the allowance
Employment Allowance	£10,500	Taken off the company’s employer National Insurance, but not if the only person paid above £5,000 is a director
Corporation tax	19% up to £50,000 profit, 25% above £250,000	Salary and employer National Insurance reduce it; dividends do not

Why a salary under £12,570 still beats a dividend

A pound of salary costs the company £1.15 with employer National Insurance, but it is an expense, so it saves 19p of corporation tax on every £1 of cost. A dividend is paid out of profit after corporation tax and is then taxed again at 10.75% once your allowances are used.

Salary up to £12,570 reaches you with no tax at all. Paying it instead of a dividend gives up a little dividend (and moves some of your dividends out of the personal allowance and into the 10.75% band), but the corporation tax saving more than pays for the 15%. Above £12,570 the sum turns round: from the same £1,150 of company profit, £1,000 of extra salary leaves you £720 after 20% income tax and 8% National Insurance, while a dividend leaves you £831.36 (£931.50 after corporation tax, less 10.75%).

A worked example

A one-director marketing consultancy in Bristol, year end 31 March 2027. The director owns all the shares, has no other income, and is the company’s only employee, so it cannot claim the Employment Allowance. The company makes £40,000 profit before paying the director anything, and the director takes everything that is left after corporation tax as dividends.

	Salary £5,000	Salary £6,708	Salary £12,570
Employer National Insurance (15% above £5,000)	£0	£256.20	£1,135.50
Profit after salary and National Insurance	£35,000	£33,035.80	£26,294.50
Corporation tax at 19%	£6,650	£6,276.80	£4,995.96
Dividend paid	£28,350	£26,759	£21,298.54
Dividend tax at 10.75%	£2,180.10	£2,192.68	£2,235.84
The director keeps (salary + dividend - dividend tax)	£31,169.90	£31,274.32	£31,632.70
Counts towards the state pension?	No	Yes	Yes

The £12,570 salary leaves the director £462.80 a year better off than £5,000 and £358.38 better off than £6,708, even though the company pays £1,135.50 of employer National Insurance. Total tax across company and director is £8,367.30 on the £12,570 salary against £8,830.10 on £5,000.

How the dividend tax works in the £5,000 column: the salary uses £5,000 of the £12,570 personal allowance, so the first £7,570 of dividends is tax-free, the next £500 is covered by the dividend allowance, and the other £20,280 is taxed at 10.75%. In the £12,570 column the salary uses the whole allowance, so only the £500 dividend allowance is tax-free.

If the company could claim the Employment Allowance (say it also employs a part-time assistant on £9,000), the £1,135.50 of employer National Insurance is covered. Profit after salary is then £27,430, corporation tax £5,211.70, the dividend £22,218.30 and the dividend tax £2,334.72, so the director keeps £32,453.58: £1,283.68 more than on £5,000.

The corporation tax calculator works out the company’s tax for your own profit figure, including marginal relief between £50,000 and £250,000, where the corporation tax saving from salary is bigger still.

When £12,570 is not the right salary

• The company makes little profit. The case for £12,570 rests on the corporation tax saving. If a £12,570 salary plus National Insurance would push the company into a loss, there is no tax to save this year, and a salary of £5,000 or £6,708 is usually better. Check the year’s profit so far before setting the salary in April.
• Your personal allowance is already used. If you have a job, a pension or rental income using the allowance, any salary is taxed at 20% and 8% on top. A salary of £5,000 (no tax for the company) or nothing at all is usually better; ask your accountant.
• You want the state pension year without the National Insurance. £6,708 is the lowest salary that counts towards a qualifying year. £5,000 does not, unless you get National Insurance credits another way.
• You need more than about £50,270 in total. Dividends above the basic rate band are taxed at 35.75%. Employer pension contributions, which are a company expense with no National Insurance, are often the next step; how much to set aside for tax shows how to provision for the personal bill.

However the money is split, the company can only pay a dividend out of profit kept after corporation tax, and it still needs the cash to pay it. How to pay dividends, and record them in Xero covers the legal limit, the cash check, the paperwork and the entries. How much can I pay myself? covers the cash side for any business.

Running the salary in Xero

1. Pay it through payroll. A director’s salary has to be reported to HMRC through PAYE, even at £5,000 a year when nothing is deducted. In Xero Payroll, add yourself as an employee, mark the employee as a director, and keep the annual National Insurance calculation method that Xero uses for directors by default.
2. Pay the same amount each month. £12,570 is £1,047.50 a month. With the annual method, no employer National Insurance is due until your pay for the year passes £5,000, so it starts on the fifth monthly pay run. Pay HMRC what payroll says you owe by the 22nd after each tax month ends on the 5th (quarterly instead if you owe less than £1,500 a month on average).
3. Let payroll post the entries. Each pay run posts the salary and the employer National Insurance to expense accounts on the Profit and Loss, and what is owed to HMRC to a liability account. Do not post the salary again as a Spend Money: when the bank feed shows the net pay leaving, match it to the payroll payment.
4. Keep dividends out of payroll. Dividends go to an equity account, are not on a payslip and have no National Insurance. A monthly transfer that is neither payroll nor a declared dividend lands on the director’s loan account.

Common questions

What is the best director salary for 2026-27? For most one-director companies with profits above roughly £20,000 and no other income for the director, £12,570. The company pays employer National Insurance above £5,000 unless it can claim the Employment Allowance, but the corporation tax saved on the salary more than covers it. If profits are small, or your personal allowance is used elsewhere, £5,000 or £6,708 is usually better.

Is it better to take salary or dividends from a limited company? Both: salary up to £12,570 because it is tax-free for you and saves corporation tax, and dividends for anything above that, because a dividend taxed at 10.75% (basic rate) leaves you more than a salary taxed at 20% plus 8% National Insurance plus 15% for the company.

Can a sole director claim the Employment Allowance? No. A company whose only employee paid above the £5,000 secondary threshold is a director cannot claim it. With a second employee, such as a spouse who works in the business and is paid above £5,000, it can.

Why do some guides say £5,000 is the best salary? At £5,000 there is no tax or National Insurance for anyone, so it has the lowest tax on the salary itself. It ignores the corporation tax the salary would have saved. Comparing what the director keeps from the same company profit, as in the table above, £12,570 comes out ahead unless the company’s profit is too small for the corporation tax saving to apply.

Do I have to run payroll for a director’s salary? Yes. Any salary must go through PAYE with a payroll submission to HMRC on or before each payday, even when no tax is due. Xero Payroll and other payroll software do this for you.

Do I pay employee National Insurance on a £12,570 salary? No. Employee National Insurance starts at the £12,570 primary threshold, and a salary from £6,708 up to £12,570 still counts towards your state pension.

Seeing it every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and last year, cash in the bank, who owes you and bills due soon. It does not run payroll or declare dividends, but profit and cash side by side each week is what tells you whether this month’s dividend is affordable. It asks Xero for read-only access, and there is a 14-day free trial with no card, then plans start at US$19 a month.