If you’re a director of your own limited company, you’ve probably heard the advice: “Pay yourself a small salary and take the rest as dividends.” It’s solid advice, but the detail matters. Get the split wrong and you could be paying thousands more in tax than you need to, or worse, attracting unwanted attention from HMRC.
In this guide, we’ll walk through the most tax-efficient way to extract profits from your company in 2026/27. We’ll cover the numbers, the reasoning, and the pitfalls to watch out for.
Why the salary/dividend split matters
When you take money out of your limited company, the way you take it determines how much tax you (and the company) pay. There are three main routes:
- Salary is subject to income tax and National Insurance Contributions (NICs), both employer’s and employee’s.
- Dividends are paid from post-tax profits. They’re subject to dividend tax but not NICs.
- Pension contributions are a corporation tax deduction for the company and aren’t taxed as your income (within annual limits).
The interaction between these three is where the savings live. Salary reduces the company’s corporation tax bill (it’s an allowable expense), but it triggers NICs. Dividends don’t attract NICs, but they’re paid from profits that have already been taxed at the corporation tax rate.
The sweet spot is a salary set at just the right level to preserve your State Pension entitlement and claim the maximum tax deduction, without triggering unnecessary NICs.
The optimal salary for 2026/27
For 2026/27, the key thresholds are:
| Threshold | Weekly | Annual |
|---|---|---|
| Lower Earnings Limit (LEL) | £125 | £6,500 |
| Primary Threshold (employee NICs) | £242 | £12,570 |
| Secondary Threshold (employer NICs) | £96 | £5,000 |
| Personal Allowance | - | £12,570 |
There are two common strategies:
Strategy A: Salary at the Primary Threshold (£12,570). You use your full personal allowance, pay no employee NICs, and the salary is a deductible expense for corporation tax. However, the company pays employer NICs on the amount above the Secondary Threshold (£5,000). Employer NICs at 15% on £7,570 costs the company around £1,136.
Strategy B: Salary at the Secondary Threshold (£5,000). No employee or employer NICs at all. You still qualify for State Pension credits (as long as you’re above the LEL). But you “waste” £7,570 of your personal allowance.
For most single-director companies, Strategy A (salary of £12,570) remains the better option in 2026/27. The corporation tax saving on the full salary (plus the employer NICs deduction) typically outweighs the employer NICs cost. The maths depends on your marginal corporation tax rate, but for the majority of owner-managed businesses, the net saving is clear.
Important: If your company has multiple directors or employees, the Employment Allowance (£10,500 in 2026/27) can eliminate or reduce the employer NICs bill entirely. Factor this in before choosing your salary level.
Dividend tax rates for 2026/27
Once you’ve set your salary, the rest of your profit extraction will typically come as dividends. Here are the rates:
| Tax band | Dividend tax rate | Income threshold (2026/27) |
|---|---|---|
| Dividend allowance | 0% | First £500 of dividend income |
| Basic rate | 8.75% | £12,571 to £50,270 |
| Higher rate | 33.75% | £50,271 to £125,140 |
| Additional rate | 39.35% | Over £125,140 |
Remember, your salary uses up part of your basic rate band first. So if you take a salary of £12,570 (covered by the personal allowance), your full basic rate band is still available for dividends.
Worked example: extracting £60,000
Let’s compare two approaches for a director wanting to take £60,000 from a company with sufficient profits.
Option 1: All salary (£60,000)
| Item | Amount |
|---|---|
| Gross salary | £60,000 |
| Employee NICs (8% on £12,570 to £50,270; 2% above) | £3,210 |
| Employer NICs (15% on salary above £5,000) | £8,250 |
| Income tax (20% basic, 40% higher) | £9,432 |
| Corporation tax saved (25% on £68,250 total cost) | -£17,063 |
| Total tax cost | £3,829 net |
Wait, that looks efficient. But the employer NICs push the total cost to the company up to £68,250, and the director only nets around £47,358.
Option 2: Salary £12,570 + dividends £47,430
| Item | Amount |
|---|---|
| Salary (no employee NICs, within personal allowance) | £12,570 |
| Employer NICs (15% on £7,570) | £1,136 |
| Corporation tax on profit used for dividends (25% on £63,240 gross profit needed) | £15,810 |
| Dividend tax: £500 at 0%, £37,200 at 8.75%, £9,730 at 8.75% | £4,106 |
| Corporation tax saved on salary + employer NICs | -£3,427 |
| Total tax cost | £17,625 |
At first glance, the all-salary route looks cheaper in total tax. But that’s misleading. The key figure is what the director actually receives in their pocket. Under Option 2, the director takes home approximately £55,894 versus roughly £47,358 under Option 1. The salary plus dividends approach puts around £8,500 more in your pocket for the same level of company profit consumed.
The reason is simple: NICs are a pure cost with no personal benefit beyond State Pension credits (which you secure with a minimal salary). Dividend tax rates are significantly lower than the combined income tax plus NICs burden on salary.
Note: These figures are illustrative. Your exact position depends on other income, the company’s total profits, and whether you have associated companies. Always get a personalised calculation.
Pension contributions: the third lever
Don’t overlook employer pension contributions. When your company contributes directly to your pension:
- The company gets a corporation tax deduction (saving 19% or 25%)
- You pay no income tax or NICs on the contribution
- The money grows tax-free inside the pension wrapper
- The annual allowance for 2026/27 is £60,000 (or 100% of earnings, whichever is lower)
For directors who don’t need all of their profits as cash today, pension contributions are one of the most tax-efficient extraction methods available. A combination of salary, dividends, and pension contributions gives you three levers to optimise your position across current income, future retirement savings, and corporation tax relief.
The Northern Ireland angle
If you’re running a limited company in Northern Ireland, the salary/dividend decision works the same way as the rest of the UK. Corporation tax rates, income tax bands, and NIC thresholds are all set at Westminster.
However, there are a few NI-specific considerations worth keeping in mind:
Invest NI grants and incentives. If your company has received grant funding from Invest NI, some grants have conditions around director remuneration or profit extraction. Check your grant letter before making changes to your salary structure.
The local economy and salary benchmarks. HMRC occasionally scrutinises directors who pay themselves very low salaries, particularly if the company is profitable and the director works full-time. While a salary of £12,570 is standard practice across the UK, NI’s lower average wage levels mean this is less likely to raise eyebrows here than in, say, London. That said, always be prepared to justify your salary level.
Employment Allowance. Many NI small businesses qualify for the Employment Allowance, which offsets up to £10,500 of employer NICs. If your company has other employees, this can make the higher salary option even more attractive.
Risks to be aware of
IR35 and off-payroll working
If you provide services to clients through your company, IR35 could apply. Under IR35, HMRC treats your income as employment income, and the salary/dividend split becomes irrelevant. You’d pay full income tax and NICs as if you were an employee. This is particularly relevant for contractors in the IT, engineering, and professional services sectors.
”Uncommercially low” salaries
HMRC has the power to challenge salary levels it considers unreasonably low. If you’re the sole director, working full-time, and the company is profitable, a salary of zero would be hard to justify. The £12,570 level is widely accepted, but make sure you can demonstrate that your remuneration policy has a commercial rationale.
Dividend waivers and family members
If your spouse or family members are shareholders, be careful with dividend waivers (where one shareholder gives up their dividend so another can receive more). HMRC can treat these as tax avoidance. If you’re planning to share dividends among family members, take advice on the “settlements legislation” rules.
Retained profits and future plans
Don’t extract every penny of profit. Retaining profits in the company builds reserves for future investment, smooths out lean years, and can improve your position when you eventually sell the business. A buyer will look at retained earnings as a sign of financial health.
How Arro can help
We calculate the optimal salary/dividend split for every owner-managed business we work with, tailored to your exact circumstances. If you’re not sure whether your current setup is costing you more than it should, get in touch for a review. It’s one of the quickest wins we can deliver.