If you run a limited company, at some point someone will tell you that paying yourself through dividends is more tax efficient than a salary. They are not wrong. But the full picture is more nuanced than that, and the version most people hear leaves out the parts that matter most.

Why the question exists

As a limited company director and shareholder, you have a choice that employees do not. You can pay yourself through the payroll as a salary, take money out as dividends from company profits, or do a combination of both. Each route is taxed differently, which means the split between them directly affects how much you keep.

Salary is subject to income tax and National Insurance, both from you as the employee and from your company as the employer. Dividends are taxed only at the personal level, under dividend tax rates that are lower than income tax rates, and with no National Insurance on either side.

That difference is why most owner-directors take a relatively small salary and draw the rest as dividends. It has been the standard approach for years and, despite changes to both dividend tax rates and employer National Insurance over the last few years, it broadly still is.

But the details of how you implement it matter considerably more than people often realise.

The three salary levels worth knowing about

For 2026/27, there are three salary levels that most directors consider. Each sits at a specific tax or National Insurance threshold and carries its own implications.

£5,000 - the employer NI secondary threshold

At this level, your company pays no employer National Insurance at all. The Secondary Threshold, the point at which employer NI kicks in at 15%, is £5,000. Keeping salary at or below this eliminates that cost entirely.

The catch is that £5,000 is below the Lower Earnings Limit. That means the year does not count as a qualifying year towards your state pension. For a director in their 30s or 40s who still needs to build their contribution record, that is a meaningful long-term cost.

£6,708 - the Lower Earnings Limit

This is the floor that preserves your state pension qualifying year. At £6,708, no income tax applies, no employee National Insurance applies, and the year counts. The company pays employer NI of around £256 on the portion above £5,000, but the salary is fully deductible against corporation tax, which partially offsets that.

This is a sensible default for sole directors who want to protect their state pension entitlement at minimal cost.

£12,570 - the personal allowance

This is the level most commonly recommended for directors whose company can claim the Employment Allowance. At £12,570, there is normally no income tax and, for most owner-directors, no employee National Insurance liability. The full salary is deductible against corporation tax, which at the small profits rate of 19% saves the company £2,388. Employer NI of around £1,136 applies on the portion above £5,000, but for companies eligible for the Employment Allowance that cost is absorbed entirely.

For companies that cannot claim the Employment Allowance, the employer NI is a real cost to set against the corporation tax saving. In most cases the corporation tax relief still outweighs it, but by a narrower margin.

Which salary strategy works best for your company?

Enter your profit figure below and select your director setup. The tool will show you the estimated net take-home under each approach for 2026/27, so you can see which one puts the most money in your pocket before you speak to an accountant.

The Employment Allowance question

The Employment Allowance reduces a company's employer National Insurance bill by up to £10,500 per year. For a director taking a salary of £12,570, it effectively wipes out the entire employer NI charge.

The problem is that not all companies can claim it. A company with only one employee paid above the Secondary Threshold, where that employee is also a director, cannot claim Employment Allowance. HMRC introduced this restriction specifically to prevent single-director companies from eliminating their employer NI on their own salaries.

If your company has a second director on the payroll, a spouse who is also a shareholder and director, or other employees paid above £5,000, you may well be eligible. The Employment Allowance changes the calculation meaningfully. A husband and wife company where both directors take a salary of £12,570 and the allowance is in place could save several thousand pounds compared with operating without Employment Allowance.

If you are not sure whether your company is eligible, it is worth checking rather than assuming.

Why salary still matters even when dividends look better

Dividends are typically more tax efficient above the personal allowance. That is not in dispute. But there are reasons to maintain a salary even in a structure where most income comes out as dividends.

• State pension entitlement. For most directors, earnings at or above the Lower Earnings Limit help secure a qualifying year towards the State Pension. Miss too many and the gap shows up in your state pension forecast. HMRC's Check Your State Pension service will show you exactly where you stand.
• Pension contributions. Employer pension contributions can be made regardless of whether you take a salary, but your personal pension contributions are capped at your earned income in any given year. A director with no earned income can still make personal pension contributions, but tax-relievable personal contributions are generally limited to £3,600 gross unless they have sufficient relevant earnings.
• Mortgage and borrowing applications. Many lenders treat director salary and dividends differently when assessing affordability. A history of consistent salary income, even a modest one, often produces a cleaner application than dividends alone. Some lenders apply an average of the last two or three years of combined income. If dividend income has been variable, a stable salary component helps.
• IR35 and employment questions. For directors of companies with other clients or multiple income streams, the way remuneration is structured can become relevant to IR35 assessments. Salary on the payroll creates a cleaner paper trail.

None of these is a reason to take more salary than makes sense for your tax position. But they are reasons not to reduce salary to zero just because dividends look more efficient on a spreadsheet.

Where the straightforward answer breaks down

The salary plus dividends approach works well for a director taking income in a straightforward way from a single company. A number of common situations make it less straightforward.

Income approaching £100,000. Once your total income, salary and dividends combined, approaches £100,000, the personal allowance taper begins. For every £2 above £100,000 you lose £1 of personal allowance, creating an effective marginal rate of 60% in that band. How you structure income at this level matters considerably. We have written about the £100,000 income trap in full should you wish to learn more.

A spouse or civil partner who is also a shareholder. Holding shares jointly and splitting dividends between two people can make effective use of a lower earner's basic rate band and dividend allowance. Done correctly, this is entirely legitimate. Done carelessly, it can attract scrutiny under the settlements legislation. The shares need to carry full rights and the arrangement needs to reflect genuine underlying ownership.

Other personal income. Rental income, savings interest, a second job, income from a previous employer in the same year: any of these affects where your dividends fall in your tax bands. Taking a large dividend that tips into the higher rate band when combined with other income costs considerably more than taking the same dividend when you are wholly within the basic rate.

Profits at different corporation tax rates. The corporation tax small profits rate of 19% applies to profits up to £50,000. The main rate of 25% applies above £250,000, with marginal relief in between. A salary deduction is worth more when the company is paying the main rate. The optimal salary level can shift depending on where your company's profits sit.

"The question is never really salary or dividends. It is always: what does the full picture look like? Every director's situation is different, and the numbers that make sense for one person can produce the wrong answer for another." David Rogers, Bernard Rogers and Co

What has changed recently

Two things have shifted the calculation in the last couple of years and are worth knowing about.

From April 2025, employer National Insurance increased from 13.8% to 15% and the Secondary Threshold dropped from £9,100 to £5,000. That made salary more expensive for companies to pay and pushed some sole directors toward the Lower Earnings Limit rather than the full personal allowance.

From April 2026, dividend tax rates increased by 2 percentage points. The basic rate on dividends is now 10.75%. The higher rate is 35.75%. The dividend allowance remains at £500, down from the £5,000 it was as recently as 2017/18.

These changes have not reversed the logic of salary plus dividends, but they have narrowed the gap. The answer to "how much should I take as dividends?" is no longer quite as obvious as it was five years ago, and the conversation with your accountant is correspondingly more important.

What we see most clients doing

For most owner-directors of profitable small companies, the structure we see working well in 2026/27 is a salary at £12,570 topped up with dividends to a level that keeps total income within the basic rate band where possible.

For sole directors who cannot claim the Employment Allowance and want to minimise employer NI, the Lower Earnings Limit salary of £6,708 with dividends on top is a reasonable alternative. It costs a little more in income tax on the salary differential but saves employer NI.

For directors with a spouse who is also a shareholder, making use of both sets of personal allowances and dividend allowances through the income split remains one of the more meaningful tax planning opportunities available to a small company.

Where pension contributions are in play, employer contributions directly from the company can improve the position significantly, reducing corporation tax while building retirement provision. This becomes especially relevant for directors approaching the £100,000 threshold where a pension contribution can restore personal allowance entitlement entirely.

None of this is a template. The optimal answer depends on your company's profit level, whether the Employment Allowance applies, your other income, your plans for the year ahead and a number of factors specific to your situation.

The conversation worth having before the year end

The most common mistake we see is not getting this wrong in principle. Most directors broadly understand that salary plus dividends is the right approach. The mistake is not reviewing it regularly enough.

Your company's profit changes year to year. Tax rates and thresholds change. Your personal circumstances change. A remuneration structure that was optimal three years ago may not be optimal now, and the difference between reviewing it and not reviewing it is often measured in thousands of pounds.

If you are a director of a limited company across Warwickshire and you have not had a proper conversation about your salary and dividend structure recently, it is worth doing. Our tax planning and advice service is built around exactly this kind of forward-looking work, reviewed regularly rather than once a year when the accounts land.

Call 01926 851516 or email davidrogers@bernard-rogers.co.uk.