For most contractors running a one-person limited company, the usual way to pay yourself in 2026-27 is a salary of £12,570 through payroll, with the rest of what you take out paid as dividends. The salary uses your whole Personal Allowance and avoids employee National Insurance. Dividends carry no National Insurance at all, but they are taxed at 10.75% in the basic rate band and 35.75% in the higher rate band once you are past the £500 dividend allowance. As a sole director you will normally pay employer National Insurance on that salary, because you cannot claim Employment Allowance.
The figures below are for the tax year 6 April 2026 to 5 April 2027 and come from GOV.UK and HMRC. Where a number is not published there for this year, we leave it out rather than guess.
The 2026-27 rates and bands in one place
These are the rates and bands that decide how a limited company director should pay themselves this year.
| Item | 2026-27 figure |
|---|---|
| Personal Allowance | £12,570 |
| Lower earnings limit (LEL) | £6,708 a year |
| Primary threshold (employee National Insurance starts) | £12,570 a year |
| Secondary threshold (employer National Insurance starts) | £5,000 a year |
| Employer National Insurance rate | 15% on pay above the secondary threshold |
| Employee National Insurance (category A) | 0% up to £12,570, 8% from £12,570 to £50,270, 2% above £50,270 |
| Employment Allowance | £10,500 |
| Dividend allowance | £500 |
| Dividend tax, basic rate | 10.75% |
| Dividend tax, higher rate | 35.75% |
| Dividend tax, additional rate | 39.35% |
| Corporation Tax, small profits rate (profits of £50,000 or less) | 19% |
| Corporation Tax, main rate | 25% |
The National Insurance figures come from HMRC's rates and thresholds for employers page on GOV.UK, last updated on 1 September 2026. The page says its figures apply from 6 April 2026 to 5 April 2027 unless it states otherwise. The dividend rates come from GOV.UK's guide to tax on dividends, which gives them for the same period.
Salary vs dividends: why limited companies use both
There are two tax systems at work, and they treat the two kinds of payment differently. That is the whole reason limited companies owned by one person tend to use a combination of salary and dividends rather than one or the other.
Salary is a business expense. It reduces the company profit that Corporation Tax is charged on. But once it passes the thresholds, it attracts National Insurance, paid by you as the employee and by the company as the employer.
Dividends are paid out of profit that has already been taxed. The company gets no Corporation Tax deduction for them. In exchange, they carry no National Insurance. Dividends are taxed through your personal tax returns at their own rates, and the first £500 of dividends falls within the dividend allowance.
So the logic of a salary and dividend mix is this. Take enough salary to get the benefit of the Personal Allowance and keep your State Pension record intact, without paying more tax and National Insurance contributions than you need to. Take the rest as dividends, which avoid National Insurance entirely.
It is a starting point, not a rule. The most tax-efficient way to pay yourself depends on how much the company earns, what other income you have, whether you make pension contributions, and whether a lender will look at your salary when you apply for a mortgage. Treat it as tax planning for the year, and have the numbers checked before you commit to them.
The tax advantage of running a business through a limited company is smaller than it used to be. Dividend rates have risen again from 6 April 2026, and Corporation Tax is higher than it was before 2023. Whether the structure still pays for you is a question of running your own figures.
Income tax and the Personal Allowance
GOV.UK gives the standard Personal Allowance as £12,570. That is the amount of income you can have each year without paying income tax. It also covers dividends: GOV.UK says you do not pay tax on any dividend income that falls within your Personal Allowance.
Two things are worth knowing:
- The allowance falls by £1 for every £2 that your adjusted net income is above £100,000, and it is zero at £125,140 or above. If your total income (salary plus dividends plus anything else) is heading towards £100,000, that taper affects your overall tax more than any single rate in the tables.
- The income tax rates and bands on GOV.UK's main page are for England, Wales and Northern Ireland: 20% from £12,571 to £50,270, 40% from £50,271 to £125,140 and 45% above that. Scotland has different bands for earnings. A salary of £12,570 is covered by the Personal Allowance either way, so no income tax is due on it.
Choosing your salary level: National Insurance thresholds
Three thresholds decide what a director's salary costs. Together with the Personal Allowance they set the optimum salary for a sole director.
The lower earnings limit, £6,708. A salary at or above this level keeps the year as a qualifying year for your State Pension. A salary below it does not. A £5,000 salary, for example, avoids all National Insurance but falls below this limit.
The secondary threshold, £5,000. Above this, the company pays employer National Insurance at 15% on the excess. If you have been paying yourself the same figure for several years, check it against this threshold, because it may now be costing the company more than it should.
The primary threshold, £12,570. Employee National Insurance of 8% starts above this. A salary of exactly £12,570 means you pay none.
Here is what three common salary levels cost the company in employer National Insurance, using the 15% rate and the £5,000 threshold:
| Salary | Employer NI (15% above £5,000) | Employee NI | Income tax | Qualifies for State Pension year? |
|---|---|---|---|---|
| £5,000 | £0 | £0 | £0 | No, below £6,708 |
| £6,708 | £256.20 | £0 | £0 | Yes |
| £12,570 | £1,135.50 | £0 | £0 | Yes |
The employer National Insurance is our arithmetic from the HMRC rate and threshold: £6,708 less £5,000 is £1,708, and 15% of that is £256.20. For £12,570, the excess is £7,570, and 15% of that is £1,135.50.
What is the most tax-efficient salary for a director in 2026-27?
For a director with no other income and a full Personal Allowance, the optimum director’s salary is usually £12,570. Your own income tax and National Insurance on that salary are nil.
Why pay the extra £879 or so in employer National Insurance to move from £6,708 to £12,570? Because the whole salary, and the employer National Insurance on it, comes off the company profit before Corporation Tax. At the 19% small profits rate, a salary of £12,570 plus £1,135.50 of employer National Insurance is £13,705.50 of deductible cost, which reduces the Corporation Tax bill by about £2,604. For a company whose profits are within the 19% band, the tax saved is larger than the National Insurance paid.
If you have other income that already uses up your Personal Allowance, the answer changes. Check before assuming.
The Employment Allowance rule for one-person companies
Employment Allowance lets an eligible employer reduce its annual employer National Insurance bill by up to £10,500 in 2026-27. For a company with several employees, that can wipe out the employer National Insurance on a director's salary entirely.
For a one-person company, it usually does not apply. GOV.UK's eligibility guidance puts it in one sentence: if your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance.
In practice, a contractor who is the sole director and the only person on payroll fails that test. The £1,135.50 on a £12,570 salary is a real cost to the company. Do not plan on claiming the allowance to offset it.
Two further points from the same guidance:
- Someone whose earnings fall within the IR35 off-payroll working rules cannot be included in a claim.
- The wording bars the case where the director is the only employee liable for secondary Class 1 contributions. Whether the company can claim because it genuinely employs someone else depends on all of the eligibility conditions, so check the full guidance on GOV.UK or ask your accountant before you rely on it.
Dividend allowance and the dividend tax rate for 2026-27
What is the dividend allowance for 2026-27?
GOV.UK states the dividend allowance as £500 a year. You pay tax only on dividend income above it. The first £500 of dividends is tax-free in the everyday sense, but it still counts towards your basic rate band.
What is the 2026 tax rate on dividends?
The dividend tax rate depends on your band. From 6 April 2026 to 5 April 2027, the rates above the allowance are:
| Tax band | Rate on dividends over the allowance |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
The band you are in depends on your total income. GOV.UK tells you to add your total dividend income to your other income, and notes that you may pay tax at more than one rate. Dividends sit on top of your salary. With a £12,570 salary, your Personal Allowance is already used by the salary, and the whole basic rate band is still available for dividends.
The basic rate band for income tax runs from £12,571 to £50,270. So after a £12,570 salary, the amount of dividend income that fits in the basic rate band is £37,700 (£50,270 less £12,570). The £500 allowance counts towards that £37,700. It is taxed at 0%, but it still takes up space in the band.
The cost of crossing the line is large. Every £1,000 of dividend in the basic rate band costs £107.50 in tax. In the higher rate band, it costs £357.50. A sensible dividend strategy keeps dividend payments inside the basic rate band unless you genuinely need the money.
GOV.UK also says that if your dividend income is above both your unused Personal Allowance and your dividend allowance, you need to report it to HMRC. For a director, that normally means the dividends go on your self-assessment tax return.
Corporation tax rate on company profit
GOV.UK's Corporation Tax page sets out the rates as follows:
- The main rate is 25%.
- Companies with profits of £50,000 or less pay the small profits rate of 19%.
- Companies with profits between £50,000 and £250,000 may be entitled to Marginal Relief.
- If profits are over £250,000, the main rate applies.
The £50,000 and £250,000 limits are reduced proportionately for short accounting periods and by the number of associated companies. A one-person company with no associated companies and a normal 12-month year has the full limits.
If your profits are between £50,000 and £250,000, the effective corporation tax rate is somewhere between the two rates, and the calculation should come from your accountant or HMRC rather than from a rule of thumb.
The point for the salary and dividend decision: Corporation Tax is worked out on profit after the director's salary and employer National Insurance have been deducted. Dividends are paid from what is left after Corporation Tax.
A worked example
Here is one contractor, set out step by step.
Assumptions: sole director and only shareholder; England; no other income; no other employees, so no Employment Allowance; no associated companies; contracts outside IR35; the company has £50,000 of profit before the director's salary and employer National Insurance; the company has enough distributable profit to pay the dividend.
Step 1. Pay a salary of £12,570.
- Income tax: nil, because the salary equals the Personal Allowance.
- Employee National Insurance: nil, because the salary does not exceed the primary threshold.
- Employer National Insurance: 15% of (£12,570 less £5,000) = £1,135.50.
Step 2. Work out the company's Corporation Tax.
- Profit £50,000 less salary £12,570 less employer National Insurance £1,135.50 = £36,294.50.
- That is below £50,000, so the 19% small profits rate applies: about £6,895.96.
- Profit after Corporation Tax: about £29,398.54.
Step 3. Pay a dividend. The company has about £29,400 available. Say it pays £29,000.
- The first £500 is covered by the dividend allowance.
- The other £28,500 is within the basic rate band, taxed at 10.75%: £3,063.75.
Step 4. Add it up.
| Amount | |
|---|---|
| Salary | £12,570.00 |
| Dividend | £29,000.00 |
| Less dividend tax | (£3,063.75) |
| Take-home | £38,506.25 |
Where the £50,000 went:
| Amount | |
|---|---|
| To you, after tax | £38,506.25 |
| Corporation Tax | £6,895.96 |
| Employer National Insurance | £1,135.50 |
| Dividend tax | £3,063.75 |
| Left in the company | £398.54 |
| Total | £50,000.00 |
The dividend tax is part of your personal tax liability, paid by you through Self Assessment, not by the company. Put the money aside as you take the dividends. If you want to test other combinations of salary and dividends, a dividend tax calculator or your accountant can run them against the same rates.
If the company had more profit to distribute. You could take dividends up to the limit of the basic rate band, £37,700, with the salary at £12,570. The £500 allowance plus £37,200 taxed at 10.75% gives dividend tax of £3,999. Total income would then be £50,270, and take-home would be £46,271. Taking more than that puts the excess in the 35.75% band.
Can spouses share the dividends?
If your spouse owns shares, dividends are paid in line with the shareholdings, and each shareholder has their own Personal Allowance and £500 dividend allowance. Two people each taking £37,700 of dividends use two basic rate bands rather than one. Take advice before adding a spouse as a shareholder. The shares must carry real rights, and the position changes if they work in the business or take a salary.
Dividend paperwork: vouchers and board minutes
A dividend is not whatever you transfer to your personal account. To be a dividend, it needs to be paid from the company's distributable profits and recorded properly:
- Board minutes record the directors' decision to declare the dividend. For a sole director, this is still a short written record.
- A dividend voucher records the date, the amount, the company and the shareholder. Issue one for each payment.
Without those records, and without profits to support the payment, money taken out of the company is likely to be treated as a director's loan, which has its own tax consequences. Paying a dividend that exceeds distributable profit creates both tax problems and company law problems. If you take a salary and dividends together, keep the payroll records and the dividend records in step.
Are there any tax consequences to getting it wrong?
The common ones are practical rather than dramatic:
- Dividends taken without enough distributable profit behind them, which can leave the payments open to challenge.
- Dividend payments that push your total income into the higher rate band without planning for the extra tax.
- No money set aside for the Self Assessment bill. If the bill is large, you may also be asked for payments on account towards the following year.
- Drawing money informally and calling it a dividend afterwards.
Setting aside a share of each dividend as you take it is the simplest way to avoid a cash shortfall in January.
Pension contributions as part of the plan
Employer pension contributions are a deductible business cost for the company and do not create a personal income tax or National Insurance charge. Once your dividends are heading into the higher rate band, a pension contribution can be a more efficient use of company profit than another dividend. The salary you pay also affects how much you can contribute personally. Pension rules are a specialist area, and an independent financial adviser should advise on the pension itself.
When the usual approach does not fit
- Inside IR35. Income from a contract caught by IR35 is treated as salary, and you cannot pay dividends from it. The salary-and-dividend structure applies to income outside IR35.
- Income near £100,000. The Personal Allowance taper makes the effective tax rate on income between £100,000 and £125,140 much higher than the headline rates.
- Other income. Rental income, savings interest or another job can use up some of your Personal Allowance and basic rate band before your dividends are counted.
Mortgages for contractors
Lenders often look at what you pay yourself, not what the company earns, so a deliberately low salary can reduce what you can borrow. There are lenders who will assess a contractor on their contract day rate rather than on their accounts, and more lenders now count dividend income as well as salary. A specialist contractor mortgage broker will know which. It is worth talking to one before you set your pay for the year if a mortgage application is coming.
Is a limited company still worth it outside IR35?
The gap between a limited company owner and a conventional employee has narrowed over the past decade, and dividend tax has risen again from April 2026. That does not make the structure pointless for work outside IR35. A company still lets you decide the timing of your dividend payments, use a spouse's allowances where they are genuine shareholders, make employer pension contributions, and deduct business expenses against company profit. Whether it leaves you better off than the alternative is a matter of your own profit and costs, so work through the figures with your accountant rather than relying on a general answer.
When a contractor should talk to an accountant
Ask an accountant before you set your salary level for the year if any of these apply: you have other income; your profits are above £50,000; you have a spouse who might hold shares; any of your contracts may be inside IR35; you plan a large pension contribution; or you want to take more than the basic rate band of dividends. Make the decision at the start of the tax year rather than the end, because the salary and the dividend payments are easier to plan than to fix afterwards.
Frequently Asked Questions
What is the dividend allowance for 2026-27?
£500. Dividend income above it is taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.
Is it better to pay yourself a salary or dividends?
For a sole director, usually both. A salary of £12,570 uses the Personal Allowance and reduces the Corporation Tax bill. Dividends then carry no National Insurance. Dividends alone would leave the Personal Allowance and State Pension record unused, and a large salary alone would attract National Insurance.
What is the most tax-efficient salary for a sole director in 2026-27?
For a director with no other income and a full Personal Allowance, £12,570 is the usual answer. A salary of £6,708 is the lowest that keeps a State Pension qualifying year, and the company pays less employer National Insurance on it.
Can a one-person company claim Employment Allowance?
Usually not. GOV.UK says that where there is only one director, they must not be the only employee liable for secondary Class 1 National Insurance. A sole director who is the only person on payroll falls foul of that.
Do dividends attract National Insurance?
No. Dividends are subject to dividend tax, not National Insurance. That is the main reason the salary and dividend combination exists.
Does the same split work if my contract is inside IR35?
No. Income caught by IR35 is treated as salary, and dividends cannot be paid from it.
Where Deplexify fits
Our contractor service is £75 a month with no setup fee. It covers your company's bookkeeping, year-end accounts, corporation tax return, confirmation statement, your own Self Assessment return with salary and dividends on one return, and dividend vouchers and board minutes. Director's payroll is an add-on at £10 a month, and a chartered accountant checks every file before it is filed.
Sources
- Rates and thresholds for employers 2026 to 2027 - GOV.UK — gov.uk, read 2026-10-17
- Tax on dividends: Check if you have to pay tax on dividends - GOV.UK — gov.uk, read 2026-10-17
- Income Tax rates and Personal Allowances : Current rates and allowances - GOV.UK — gov.uk, read 2026-10-17
- Employment Allowance: Check if you're eligible - GOV.UK — gov.uk, read 2026-10-17
- Corporation Tax rates, expenses and reliefs: Rates - GOV.UK — gov.uk, read 2026-10-17
- Dividends in 2026/27: an expert’s explainer for contractors | Contractor UK — contractoruk.com, read 2026-10-17
- The best salary and dividend split for directors in 2026/27 - ByteStart — bytestart.co.uk, read 2026-10-17
- The optimal salary/dividend split for PSC contractors in 2026/27 — freelancerfinancials.co.uk, read 2026-10-17
- Contractor Salary: Choosing a Tax-Efficient salary in 2026/27 — inniaccounts.co.uk, read 2026-10-17
- FSB | Director salary and dividends 26/27: Tax-efficient pay guide — fsb.org.uk, read 2026-10-17
- The optimum salary for limited company directors in 2026/27 — itcontracting.com, read 2026-10-17
- Optimal Salary & Dividend Split for Contractors 2026/27 — theaccountingcrew.co.uk, read 2026-10-17