How to Pay Yourself from a Limited Company in 2026/27: The Tax-Efficient Approach

Running a limited company gives you significant flexibility in how you draw income — but with that flexibility comes complexity. The most tax-efficient approach in 2026/27 is to combine a low salary with dividends, but the optimal figures depend on your circumstances. This guide explains the key strategies and the numbers for the current tax year.

Why Salary + Dividends Works

As a company director and shareholder, you can take income in two forms: salary (processed through PAYE) and dividends (paid from post-corporation-tax profits). The reason this combination is tax-efficient is that dividends are taxed at lower rates than salary, and a small salary protects your State Pension entitlement without creating a large income tax or National Insurance bill.

Corporation tax in 2026/27 is 25% for profits over £250,000 and 19% for profits under £50,000, with marginal relief between these thresholds. Salary is deductible against corporation tax; dividends are not.

The Optimal Salary for 2026/27

Most accountants recommend one of two salary levels:

Option 1: £12,570 (the personal allowance) Taking a salary equal to the personal allowance means you pay no income tax on it. However, you will pay employee National Insurance above £12,570 (at 8%) and employer NIC above £5,000 (at 15%). In practice, the employer NICs make this option less efficient than Option 2.

Option 2: £9,100 (the Secondary Threshold — most common) The employer NIC secondary threshold for 2026/27 is £5,000 per employee (lowered from £9,100 in April 2025 — a significant increase in cost for many small businesses). For a director who is the sole employee, many accountants now suggest paying a salary at or around the Primary Threshold of £12,570 and accepting the small employer NIC cost, since the salary remains fully deductible for corporation tax.

The precise optimal salary depends on your company's NIC Employment Allowance eligibility. The Employment Allowance was increased to £10,500 in April 2025, meaning companies with eligible employees can offset up to £10,500 of employer NICs per year — potentially making a £12,570 salary cost-neutral.

Key point: If your company has no other employees, you are not eligible for the Employment Allowance.

Taking Dividends

Dividends are paid from profits after corporation tax. In 2026/27, the dividend allowance is £500 — the first £500 of dividend income is tax-free for all shareholders.

Above the allowance, dividends are taxed at:

• 8.75% for basic-rate taxpayers (income up to £50,270)
• 33.75% for higher-rate taxpayers (income £50,270–£125,140)
• 39.35% for additional-rate taxpayers (above £125,140)

Compare this to income tax on salary: 20% basic rate, 40% higher rate. Dividends are cheaper at every level — but only from profits that have already been taxed at 19–25% corporation tax.

Worked Example for 2026/27

Assume the company makes £80,000 profit before your salary, and you take a salary of £12,570.

• Salary: £12,570 → no income tax (covered by personal allowance), modest employee/employer NIC applies above thresholds
• Corporation tax on remaining profit: £80,000 − £12,570 = £67,430 profit → approx. £13,400 corporation tax (at 19% for small profits)
• After-tax profit available for dividends: ~£54,030
• First £500 of dividends: tax-free
• Remaining dividends: taxed at 8.75% (basic rate)

Total income: ~£66,600. Tax paid: lower than if you'd taken a £80,000 salary through PAYE.

A comparison: in the US, S-Corp owners face similar decisions between salary and distributions, with the IRS requiring a "reasonable salary." In Australia, trust distributions offer analogous tax planning.

Checklist for Directors

• Confirm your salary level with your accountant (typically £12,570 or the secondary threshold)
• Check Employment Allowance eligibility if you have other employees
• Ensure the company is profitable before declaring dividends
• Declare dividends formally with board minutes and dividend vouchers
• Don't exceed your dividend allowance of £500 before calculating tax
• Report dividend income on your Self Assessment return
• Review pension contributions — company contributions are a tax-efficient alternative to higher salary or dividends
• Consider whether your spouse or partner could hold shares for additional dividend allowances

Key Numbers

• Corporation tax: 19% (under £50,000 profit), 25% (over £250,000)
• Personal allowance 2026/27: £12,570
• Dividend allowance: £500
• Basic-rate dividend tax: 8.75%
• Employer NIC secondary threshold: £5,000
• Employment Allowance: up to £10,500

Sources

• GOV.UK – Tax on Dividends
• GOV.UK – Corporation Tax Rates
• GOV.UK – Income Tax Rates
• GOV.UK – Employment Allowance

Educational content only — not financial advice.