Salary or dividends in 2026/27? How owner-directors should pay themselves

If you own your limited company, how you pay yourself is one of the few tax decisions entirely within your control, and one of the most frequently left on autopilot. A mix that was optimal three years ago can quietly cost you four figures a year today.

The moving parts

Four numbers drive the answer in 2026/27:

• Dividend allowance: £500. Only the first £500 of dividends is tax-free; above that, 8.75% in the basic band and 33.75% in the higher band.
• Corporation tax: 19%–25%. Dividends come out of post-corporation-tax profit, so the company's marginal rate (19%, ~26.5% in the £50k–£250k marginal band, or 25%) changes the true cost of a dividend.
• Employer NI: 15% above £5,000. Salary above the £5,000 secondary threshold attracts employer NI, but salary (and the NI on it) is deductible for corporation tax, which dividends are not. The Employment Allowance can offset up to £10,500 of employer NI for eligible companies, though companies where the sole director is the only employee don't qualify.
• Your personal position. Other income, pension plans, child benefit (the charge starts at £60,000 adjusted net income), and student loans all move the target.

The shape of the usual answer

For most owner-directors, some salary is always right: it's corporation-tax-deductible, and a salary above the lower earnings limit banks your state pension qualifying year, valuable even when NI is due. Where in the range between the NI thresholds and the personal allowance your ideal salary sits depends on the Employment Allowance and whether the company pays higher-band corporation tax.

Beyond that, dividends usually carry the load up to the higher-rate threshold, but employer pension contributions frequently beat both salary and dividends for money you don't need to spend this year: deductible for the company, no NI, no income tax now.

The mistakes we see most

1. Dividends without profits. Dividends can only be paid from distributable reserves. Paying them from an overdrawn position creates an illegal dividend and a director's loan problem.
2. No paperwork. Dividends need declarations and vouchers, dated when actually decided. HMRC challenges reclassify sloppy drawings as salary, with NI attached.
3. Set-and-forget. Thresholds move most years. We recalculate every client's mix annually as part of tax planning. The review typically pays for itself several times over.

This article is general information, not advice for your specific circumstances. For advice you can act on, book a free consultation or call us on 0151 944 4342.