Every director faces the same question at some point: should I take salary, dividends, or both? The answer changes depending on your profit, your circumstances, and the tax year.
The 2026/27 tax year has specific allowances and rates that change how you should structure your income. Let's walk through exactly what you need to know to make the right decision for your business.
The Basic Building Blocks for 2026/27
To plan properly, you need to know the key numbers:
- Personal allowance: £12,570. This is the amount you can earn from salary before paying income tax.
- National Insurance threshold: £9,100. You pay National Insurance on salary between £9,100 and £50,270.
- Dividend allowance: £1,000. You can take £1,000 of dividends tax-free each year.
- Basic rate dividend tax: 10.75%
- Higher rate dividend tax: 35.75%
- Corporation tax rate: 25% (on profits over £250,000)
These are the constraints you're working within. Your job is to structure your income to minimise tax within them.
The £12,570 Myth
You've probably heard that the optimal director salary is £12,570. It's become almost gospel. But here's the problem: it doesn't work for everyone.
At £12,570 salary, you pay no income tax and claim your personal allowance. That's good. But you also pay no National Insurance on that salary, which looks even better. So where's the catch?
The catch is that you then need to pay yourself in dividends to take the rest of your profit out of the company. And dividends are less tax-efficient than salary at lower profit levels.
If your profit is under £50,000, a £12,570 salary might not be optimal at all. You might be better off taking a higher salary.
If your profit is £50,000 to £75,000, the £12,570 salary starts to make more sense, because your dividend tax rate at that point becomes more punitive.
If your profit is above £75,000, the £12,570 salary is definitely worth considering, because dividends become very expensive tax-wise.
The sweet spot isn't the same for everyone. It depends on your specific numbers.
Comparing Salary vs Dividends vs Both
Let's look at a practical example. You're running a limited company making £60,000 profit. How should you extract that?
Option 1: £12,570 salary + dividends
- Salary: £12,570 (no tax, no National Insurance)
- Company profit after salary: £47,430
- Corporation tax at 25%: £11,858
- Available for dividends: £35,572
- Dividend allowance: £1,000 tax-free
- Taxable dividends: £34,572
- Dividend tax at 10.75%: £3,716
- Your net take-home: £45,426
Option 2: £25,000 salary + dividends
- Salary: £25,000 (income tax and NI due)
- Your net from salary: £20,240
- Company profit after salary: £35,000
- Corporation tax at 25%: £8,750
- Available for dividends: £26,250
- Dividend tax (after £1,000 allowance): £2,699
- Your net take-home: £44,791
So in this scenario, Option 1 is slightly better. But the difference is small—less than £700. And Option 1 means more complexity and administrative burden.
This is why your accountant should be running these scenarios for you. What's optimal for you depends on your exact profit level, whether you have other income, and your personal circumstances.
Use the payroll cost calculator to Model Your Scenario
Rather than guessing, use the calculator to see what works for your specific situation. Put in your expected profit, and it'll show you the tax outcome of different salary levels.
Pension Planning: The Tax Shelter You're Missing
Here's where many directors get it wrong. They focus entirely on salary and dividends and ignore pensions. That's a mistake.
Pension contributions are the most tax-efficient way to extract money from your company. Here's why:
- You can contribute up to £60,000 per year to a pension
- The company gets a corporation tax deduction for the contribution
- You don't pay any income tax or National Insurance on it
- The money grows tax-free inside the pension
If your company makes £75,000 profit and you want to extract £55,000 for living expenses, you could:
- Pay yourself £35,000 salary + £20,000 dividends, or
- Pay yourself £25,000 salary + £20,000 dividends + £10,000 pension contribution
The second option saves you money on corporation tax and gets you an extra £10,000 away tax-free.
Not everyone can afford to lock money away in a pension. But if you can, it's the most efficient way to reduce your tax bill. Seriously consider it in your tax planning.
Getting Professional Help
You shouldn't be guessing at this. Every director should have a conversation with their accountant in May or June about how to structure the rest of the year. It takes an hour, and it can save thousands.
If you're not having that conversation with your accountant, you're probably leaving money on the table. Talk to us about tax planning for directors. We'll run the scenarios, show you the numbers, and make sure you're not overpaying.
Key Takeaways
- £12,570 isn't automatically optimal for everyone. Run the numbers for your situation.
- The choice between salary and dividends is a trade-off between different taxes. Lower profits favour salary, higher profits favour the £12,570 + dividends approach.
- Pensions are the tax-efficient way to extract company money. If you can afford to contribute, you should.
- Have the conversation with your accountant in May or June, not January. It's too late to plan by then.
