As a company director, you have more flexibility than a typical employee in how you take income from your business — usually through a combination of salary and dividends. Getting the balance right can make a meaningful difference to your overall tax bill, but the "right" answer depends on your company's profit level, whether Employment Allowance is available, and your personal income from other sources. This page explains the current mechanics; talk to us for a calculation tailored to your specific position.
How salary is taxed:
Your salary is subject to Income Tax and National Insurance in the normal way. For 2026/27:
- No employee National Insurance is due until your salary reaches the Primary Threshold of £12,570 a year.
- Above that, employee NI is charged at 8% up to £50,270, and 2% on anything above that.
- Your company pays employer's (secondary) National Insurance at 15% on salary above £5,000 a year — though many small companies can offset this using the Employment Allowance, which can make a higher salary more tax-efficient than it first appears.
- Salary is also a deductible expense for Corporation Tax purposes, which is what makes it worth taking some salary even though it attracts NI.
How dividends are taxed:
Dividends are paid from company profits after Corporation Tax has already been deducted, and are taxed separately from salary at dividend-specific rates. From April 2026:
- The first £500 of dividend income in a tax year is tax-free (the dividend allowance).
- Above that, dividends falling in the basic rate band are taxed at 10.75%.
- Dividends falling in the higher rate band are taxed at 35.75%.
Unlike salary, dividends carry no National Insurance charge at all — which is why a "low salary, dividend-topped-up" approach has traditionally been the standard advice for owner-directors.
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Why the standard advice has shifted:
For many years, the default recommendation was to take a very low salary (often around the NI secondary threshold) and draw the rest as dividends, to minimise NI entirely. That's no longer automatically the most efficient approach for every director. Two things have changed the calculation:
- Where Employment Allowance is available, the Corporation Tax relief gained from paying a higher salary — up to the full £12,570 Personal Allowance — can outweigh the extra employer NI cost, making a higher salary more efficient than the old "minimal salary" approach.
- Dividend tax rates have risen twice in recent years, narrowing the gap between salary and dividends and making the calculation more sensitive to your specific circumstances than it used to be.
As a result, £12,570 — the full Personal Allowance — has become a common starting point for many directors, but it isn't a universal rule. The right figure depends on whether your company qualifies for Employment Allowance, your Corporation Tax rate, and whether you have income from other sources.
Watch out for the personal allowance taper:
If your total income (salary plus dividends plus anything else) falls between £100,000 and £125,140, you lose £1 of tax-free Personal Allowance for every £2 earned above £100,000 — creating an effective marginal tax rate of around 60% in that band. If you're likely to be in this range, it's particularly worth planning your extraction strategy carefully, for example by considering pension contributions to bring your income back under £100,000.
The bottom line:
There's no longer a single "best" salary figure that applies to every director — the right answer depends on your company's profits, Employment Allowance eligibility, Corporation Tax position, and your total personal income. We review this with clients individually and can advise on the combination that works best for your specific circumstances, updated each tax year as rates and thresholds change.
Contact us to discuss your optimal salary and dividend strategy for the current tax year.
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