If you own a limited company, you have probably come across advice telling you the 'best' salary to pay yourself each year.
The trouble is that there is no single figure that works for every director.
The right answer can change depending on whether you employ anybody else, whether the company can claim Employment Allowance, whether you have another job or other income, how profitable the company is, how much money you actually need to take out and how much cash the business needs to keep for tax and other bills.
There is also another reason to review the calculation for 2026/27. Dividend tax rates have increased. So rather than copying whatever salary and dividend split you used last year, it is worth checking whether it still makes sense.
What is the difference between salary and dividends?
A salary is paid to you as a director or employee. It goes through payroll. Depending on how much you are paid, Income Tax and National Insurance may be due.
For the company, salary normally counts as a business cost when working out its profit for Corporation Tax.
A dividend is different. You receive a dividend because you own shares in the company. Dividends do not reduce the company's Corporation Tax bill. The company also needs enough profit available before it can legally pay them.
That is why salary and dividends cannot be compared by looking only at the amount that reaches your personal bank account.
What changed for dividends in 2026/27?
The Dividend Allowance remains £500.
Above that allowance, the 2026/27 dividend tax rates are 10.75% for dividends falling within the basic-rate band, 35.75% for dividends falling within the higher-rate band and 39.35% for dividends falling within the additional-rate band.
The first two rates are higher than they were in 2025/26. That does not mean directors should stop taking dividends. It means the calculation is different from last year.
What about salary?
For 2026/27, the standard Personal Allowance remains £12,570. Employee National Insurance also normally starts once annual earnings go above £12,570.
Employer National Insurance starts at a much lower level. For 2026/27, the employer threshold is £5,000 and the standard employer rate above that is 15%. That can make quite a difference for a small company.
What happens if you are the only director and employee?
Suppose you are the only director and employee and the company pays you a salary of £12,570. You may have no employee National Insurance deducted from that salary.
But the company can still have employer National Insurance to pay. The amount above the £5,000 employer threshold is £7,570. At 15%, that gives employer National Insurance of £1,135.50.
At first glance, you might think the obvious answer is to reduce the salary. But the salary and the employer National Insurance normally reduce the company's taxable profit. That can reduce the Corporation Tax the company pays.
So you need to compare both sides of the calculation before deciding which salary produces the better result.
The answer can be different if you employ other people
Employment Allowance can reduce the employer National Insurance bill for businesses that qualify. For 2026/27, it is worth up to £10,500.
However, if you are the only director and the only employee whose pay creates employer National Insurance, your company will generally not qualify.
If your company employs somebody else who is also paid above the relevant employer National Insurance threshold, the company may qualify, provided the other Employment Allowance rules are met. That can change the cost of paying you a salary.
That is one reason why copying another director's salary figure can be misleading. Their company may not look like yours.
Your other income matters
Imagine you already earn £45,000 from another job. Your company salary and dividends do not start from zero. They sit on top of the income you already receive.
That can affect how much Income Tax you pay and which dividend rate applies. The same can happen if you also receive rental income, pension income, investment income or income from another business.
If you are a Scottish taxpayer, the Income Tax rates applying to salary are also different. So before deciding how much salary to take, look at all of your income rather than just the company payroll.
Having cash in the bank does not automatically mean you can take a dividend
Suppose the company has £30,000 in its bank account. That does not automatically mean you can declare a £30,000 dividend.
The company needs enough profits, after taking account of earlier losses and dividends already paid, to support the dividend. Cash and profit are not the same thing.
There is also a second question. Even if the company has enough profit to pay the dividend, can it afford to lose the cash?
You may have Corporation Tax coming up, VAT due, PAYE to pay, wages, suppliers, loan repayments or a quieter trading period ahead. A dividend can be perfectly legal and still leave the company short of cash.
Do you actually need to take all of the money out?
Directors sometimes approach the salary and dividend question as though every pound of company profit has to reach their personal bank account. It does not.
You may decide to leave some money in the business. You may also want to consider whether an employer pension contribution makes sense for some of the money you do not need personally today.
That is not the same as receiving cash yourself, but it can form part of the wider decision.
So how should you pay yourself in 2026/27?
Before deciding, look at any income you already receive elsewhere, whether the company employs anybody else, whether Employment Allowance is available, how much profit the company has made, how much profit is actually available for dividends, how much money you need personally and what bills the company needs to keep cash for.
Then compare the options.
For many directors, a combination of salary and dividends will still make sense. The important thing is making sure the figures belong to your company and your finances rather than copying a standard calculation from the internet.
If you are unsure how much you can safely take from your company, Thames Williams can look at your company accounts, payroll and personal tax together.
You may also want to read our guide to whether a director can invoice their own company.
