If you run a limited company, one of the most important tax planning decisions is how to pay yourself efficiently.
Tax Efficient Salary
Dividend Strategy
10.75% Basic Rate
Save Thousands
For most company directors, the most tax-efficient approach in the 2026/27 tax year is usually a combination of:
Using the right mix can help reduce:
Income Tax
National Insurance
Personal Tax Liabilities
Understanding how each payment method works is key to optimising your tax position
A salary is paid through PAYE payroll and is treated as an allowable business expense for Corporation Tax purposes.
However, salary can trigger:
Dividends are payments made to shareholders from company profits after Corporation Tax has been paid.
Dividends:
This is why many directors use a combination of salary and dividends.
For many single-director limited companies, the most tax-efficient salary in 2026/27 is commonly either:
Lower Earnings Limit threshold
Personal Allowance threshold
Many single-director companies where the director is the only employee paid above the Secondary Threshold often continue using a lower salary around the Lower Earnings Limit to avoid employer National Insurance while still maintaining State Pension entitlement.
Other directors may choose a salary up to the Personal Allowance threshold of £12,570 depending on the wider tax position and available reliefs.
The dividend allowance for the 2026/27 tax year remains:
Dividend Allowance
Tax free dividends
| Tax Band | Dividend Tax Rate |
|---|---|
| Basic Rate | 10.75% |
| Higher Rate | 35.75% |
| Additional Rate | 39.35% |
These rates apply from 6 April 2026
View HMRC Dividend Tax RatesFor many directors, the common strategy follows two simple steps
Take a salary at an efficient threshold.
Typically £6,708 or £12,570 depending on your circumstances.
Take the remaining income as dividends.
After Corporation Tax is paid on company profits.
Personal Allowance
Salary can utilise your Personal Allowance
Lower Tax Rates
Dividends taxed at lower rates than salary
No National Insurance
Dividends don't attract National Insurance
Let's assume a typical scenario
Single director/shareholder
Solo Director
No other income
Employment Only
Standard tax treatment
UK Resident
Salary
£12,570
Dividends
£37,700
Total Income
£50,270
Estimated personal dividend tax: Approximately £3,999
This example is simplified and does not include Corporation Tax, other income sources, student loans or pension contributions.
Calculate your exact tax position for the 2026/27 tax year
Salary & Dividend Tax CalculatorThe exact optimal salary and dividend mix depends on:
Understanding the limitations of each approach
Dividends can only be paid:
Most directors still take at least a small salary because:
Taking all income as salary often creates:
For many limited company directors, combining salary and dividends remains more tax efficient than salary alone.
Avoid these common pitfalls when planning your salary and dividends
Dividends are paid after Corporation Tax. This is one of the biggest misunderstandings around dividend planning.
The company pays Corporation Tax first
Dividends are then taxed personally
Improper dividends can create tax and compliance problems later. Dividends should always be:
Accurate bookkeeping is essential for:
Keeping clean records throughout the year can make a significant difference when preparing annual accounts and tax returns.
Learn more about our Cheap Accountants
Many company directors now work with online accountants for limited company support because it allows:
Annual Accounts
Corporation Tax
Payroll
Dividend Planning
Bookkeeping
Director Tax Advice
Common questions about salary and dividends for limited company directors
Choosing the right salary and dividend mix can save company directors thousands of pounds over time.