Most UK limited company directors pay themselves a combination of a small salary and dividends to minimise total tax. Salary is deductible from corporation tax; dividends are not subject to National Insurance. The optimal split depends on your profit level and personal circumstances — but the principle applies to most owner-managed companies.
Why do directors use salary plus dividends?
The logic is straightforward. A salary paid to a director is a deductible business expense — it reduces the company's taxable profit and therefore its corporation tax liability. Dividends, by contrast, are paid from post-tax profit and are not deductible.
The advantage of dividends is that they are not subject to National Insurance contributions (NI) — neither employer NI nor employee NI. Salary above the secondary threshold triggers employer NI at 13.8% (from April 2025, above £5,000 per employee per HMRC) and employee NI at 8% (above £12,570 per HMRC). Dividends carry none of that.
The result: for a director-shareholder, taking most of their income as dividends and keeping the salary small produces a materially lower total tax and NI burden than taking the equivalent as salary alone.
What is the optimal salary level for a company director in 2026?
Three salary levels are commonly used by accountants, each with different trade-offs:
| Salary level | NI cost | Corporation tax saving | State pension credit |
|---|
| £0 | None | None (no CT deduction) | No qualifying year |
| £6,396 (LEL) | None | ~£1,215 at 19% CT rate | Qualifying year earned |
| £9,100 (secondary threshold) | None | ~£1,729 at 19% CT rate | Qualifying year earned |
| £12,570 (personal allowance) | Employer NI on £3,470 above £9,100 = ~£479 | ~£2,388 at 19% CT rate | Qualifying year earned |
From April 2025, HMRC lowered the employer NI secondary threshold from £9,100 to £5,000. A salary of exactly £9,100 now triggers employer NI on the £4,100 between £5,000 and £9,100 (approximately £566). Many accountants now recommend £5,000 as the cleanest low-NI salary level, or continuing at £9,100 and factoring the small NI cost into the calculation.
The Employment Allowance (up to £10,500 per employer from April 2025, per HMRC) can offset employer NI — but sole director companies where the director is the only employee are not eligible for the Employment Allowance.
How are dividends taxed for limited company directors?
Dividends are paid from the company's post-corporation-tax profits. They are not a business expense. When received by the director-shareholder, they are taxed as follows (per HMRC, 2025/26 rates):
- First £500 — tax-free (dividend allowance)
- Basic rate band — 8.75%
- Higher rate band — 33.75%
- Additional rate (above £125,140) — 39.35%
Dividends sit on top of other income in the tax calculation. A director who takes a £12,570 salary and £40,000 in dividends will have used the personal allowance against the salary. The dividends then fill from the bottom of the basic rate band, with the first £500 tax-free and the remainder at 8.75%.
Worked example: salary plus dividends vs salary only
A director wants to extract £50,000 from their profitable limited company in 2025/26. Compare two approaches:
| Scenario | Salary + dividends | Salary only |
|---|
| Salary | £9,100 | £50,000 |
| Dividends | £40,900 | £0 |
| Income tax (approx) | ~£2,800 | ~£7,486 |
| Employee NI (approx) | £0 | ~£3,000 |
| Employer NI (approx) | ~£566 | ~£5,651 |
| Total tax + NI | ~£3,366 | ~£16,137 |
These figures are approximate and do not account for corporation tax on the dividend-paying scenario (the company's taxable profit is higher when salary is lower). The total saving will vary based on profit levels, other income, and accounting choices. Speak to an accountant to model your specific position.
When doesn't the salary-dividend split work?
The model only works when the company has sufficient distributable reserves (retained post-tax profits) to pay dividends. Paying dividends that exceed distributable profits is illegal under the Companies Act 2006 — they become unlawful dividends and can be clawed back.
IR35 (off-payroll working rules) can also neutralise the benefit. Contractors deemed to be inside IR35 must treat their income as employment income for tax purposes — the salary-dividend split no longer applies, per HMRC.
Additionally, salary-based benefits such as statutory maternity pay, mortgage lending assessments, and some pension calculations use the salary figure only. Taking a very low salary may reduce entitlements or borrowing capacity.
Frequently asked questions
What is the most tax-efficient way to pay yourself from a limited company in 2026?
The most tax-efficient approach for most director-shareholders is a salary at or near the National Insurance lower earnings limit (around £6,396–£9,100) plus dividends up to the basic rate band. This minimises NI while using the personal allowance and dividend allowance. The exact optimal level depends on your company's profit and your other income.
How much dividend can a director take tax-free?
The first £500 of dividend income is tax-free under the dividend allowance per HMRC (2025/26). Dividends within the basic rate band above the allowance are taxed at 8.75%. To take dividends, the company must have sufficient distributable profits (post-tax retained earnings) to cover the payment.
Are dividends subject to National Insurance?
No. Dividends are not subject to National Insurance contributions — neither employer NI nor employee NI. This is the primary reason the salary-plus-dividends model is tax-efficient for director-shareholders. Salary, by contrast, triggers employer NI at 13.8% above £5,000 per year and employee NI at 8% above £12,570.
Can you take dividends if your company is not making a profit?
No. Dividends can only be paid out of distributable profits — post-tax retained earnings recorded in the company's accounts. A company that is loss-making or has no retained profits cannot legally pay dividends. Doing so creates an unlawful dividend that directors may be personally liable to repay.
Does taking dividends affect your mortgage application?
It can. Many mortgage lenders assess limited company directors on salary plus dividends, using two to three years of tax returns to verify income. Some lenders use salary only, which can significantly understate a director's income. Using a mortgage broker experienced with company directors is strongly recommended.