Every director of a small limited company arrives at the same question in their first year: how do I actually get money out of this thing? The pub answer — take a small salary and the rest as dividends — is broadly right, and it is also the reason a lot of owners get the details wrong. Two things changed on 6 April 2026: dividend tax rates went up by two percentage points, and the Employment Allowance stopped being restricted to employers with a smaller National Insurance bill. Both shift the sums.
Here is how the split actually works, what it is worth on real figures, and the paperwork that turns a legitimate dividend into an expensive mistake when it is missing.
Salary and dividends are taxed in completely different places
A salary is a company expense. It reduces the profit the company pays corporation tax on, and so does the employer National Insurance that comes with it. In 2026/27 employer NI is 15% on earnings above the secondary threshold of £5,000 a year. The director then pays income tax on the salary, plus employee NI at 8% on earnings between £12,570 and £50,270 and 2% above that.
A dividend is not an expense. It is a distribution of profit the company has already paid corporation tax on — 19% up to £50,000 of profit, 25% above £250,000, and an effective 26.5% on every pound in between. There is no National Insurance on a dividend at all, for either side. After the £500 dividend allowance, the director pays 10.75% within the basic rate band, 35.75% in the higher rate band and 39.35% above that.
So the trade is straightforward once you see it. Salary escapes corporation tax but attracts National Insurance twice over. Dividends escape National Insurance entirely but are taxed twice — once in the company, once in your hands.
Why £12,570 is usually the starting salary
The personal allowance and the employee National Insurance primary threshold both sit at £12,570, and both are frozen until 2031. A salary at exactly that level therefore carries no income tax and no employee National Insurance, while still counting as a qualifying year for the state pension.
It does trigger employer National Insurance: 15% of the £7,570 between the £5,000 secondary threshold and £12,570, which is £1,135.50. If your company can claim the Employment Allowance — £10,500 for 2026/27, and the old £100,000 National Insurance liability cap has been removed, so eligibility is now much wider — that charge disappears entirely. The catch that trips up most one-person companies: a company whose only employee is a single director cannot claim it. You need a second employee or director earning above the secondary threshold.
Even without the allowance, the salary is still worth paying. The £13,705.50 of total employment cost comes off taxable profit, saving £2,604 of corporation tax at 19% — comfortably more than the £1,135.50 of National Insurance it cost.
A worked example
The figures below are illustrative; the arithmetic is the point. Take a company with £60,000 of profit before paying its sole director anything, no other staff, and therefore no Employment Allowance.
Route A — salary of £12,570, the rest as dividends. Employer National Insurance is £1,135.50, so total employment cost is £13,705.50. That leaves £46,294.50 of taxable profit, and corporation tax at 19% takes £8,795.96. The company can distribute £37,498.54. Personally, the salary is tax-free, £500 of the dividend is covered by the allowance, and the remaining £36,998.54 is taxed at 10.75% because total income of £50,068 stays just under the higher rate threshold — £3,977.34. The director ends up with £46,091.
Route B — take the lot as salary. Working backwards from £60,000, the salary is £52,826 and employer National Insurance is £7,174. Income tax is £7,540 at 20% plus £1,022 at 40%, a total of £8,562. Employee National Insurance is £3,016 plus £51, a total of £3,067. There is no corporation tax, because the profit has gone. The director ends up with £41,197.
The difference is about £4,900 on the same £60,000 of profit. That is the whole argument for the split, and it is worth more than most of the expenses people agonise over.
What April 2026 changed
The basic dividend rate went from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%, both announced at the Autumn Budget 2025. The additional rate held at 39.35% and the dividend allowance stayed at £500. On the example above, that costs the director roughly £740 more than the identical arrangement would have cost in 2025/26.
The direction of travel matters more than the single year. Dividend rates have been rising while National Insurance on employment has been getting more expensive too, and the gap between the two routes has been narrowing steadily. It still favours dividends. It favours them by less than it did, which makes the third option — an employer pension contribution, which is a deductible company expense with no National Insurance and no income tax on the way in — increasingly worth putting in the same conversation.
The paperwork people skip, and what it costs
A dividend can only be paid out of distributable profits: accumulated profit after corporation tax. Cash in the bank is not the test. If a third of the balance is VAT you have collected and corporation tax you owe, that money was never available to distribute, and treating it as though it was is where owners get into trouble.
Every dividend needs a board minute recording the decision and a dividend voucher showing the date, the company, the shareholder and the amount. Both should be created at the time, not reverse-engineered by your accountant nine months later. Dividends must also be paid in proportion to shareholdings — if you own 60% of the shares, you take 60% of any dividend declared.
When a dividend turns out to be unlawful because the profits were not there, it does not simply vanish. It is typically reclassified as money you owe the company, which drags in the whole director's loan regime: a section 455 charge on the company, a benefit-in-kind if the balance is large and interest-free, and a repayment deadline nine months after the year end. What taking money out of your own company really costs covers that trap in full.
What a low salary quietly costs you
Three things are worth weighing before you settle on the smallest possible salary. Personal pension contributions are capped at your relevant UK earnings, which means salary and not dividends — though a contribution made by the company rather than by you sidesteps that entirely. Statutory payments such as maternity pay and sick pay depend on earnings above the lower earnings limit, so a salary set too low can cost far more than it saves in the year you need them. And lenders assess salary and dividends differently, which is one of several reasons the picture a lender builds of you is worth understanding before you need them — see what a lender sees before they read a word you wrote.
Five things to do this week
Confirm you are actually on the payroll with real-time submissions going to HMRC, because a salary that was never reported is not a deductible salary. Check whether a second earner in the business makes the Employment Allowance claimable. Run the two-route sum above on your own profit figure rather than assuming last year's split still fits. Write up board minutes and vouchers for every dividend taken so far this year. Then put a review in the diary for February, while there is still time to act before 5 April rather than after it.
Common questions
Is it better to take salary or dividends in 2026/27?
For most owner-directors of small limited companies, a combination beats either alone. A salary around £12,570 uses the personal allowance, keeps the year qualifying for the state pension and is deductible against corporation tax, while dividends on top escape National Insurance entirely. On a company with £60,000 of profit before the director is paid, that split leaves roughly £4,900 more in the director's pocket than taking the whole amount as salary. The right answer changes if you have other income, if the company can claim the Employment Allowance, or if profits push you into higher rate territory, so it is worth recalculating each year rather than repeating last year's arrangement.
How much can I pay myself before paying any tax?
The personal allowance is £12,570 for 2026/27 and the employee National Insurance primary threshold sits at the same figure, so a salary of £12,570 carries no income tax and no employee National Insurance. The company still pays employer National Insurance at 15% on the £7,570 above the £5,000 secondary threshold, which is £1,135.50, unless it can claim the £10,500 Employment Allowance. On top of that, the first £500 of dividend income is covered by the dividend allowance. Both figures are frozen, so the practical value of the allowance falls a little every year that wages and prices rise.
Do dividends avoid National Insurance?
Yes. Dividends carry no National Insurance for the company or the shareholder, which is the main reason the small-salary-plus-dividends structure exists. They are not tax-free, though. A dividend is paid out of profit the company has already paid corporation tax on at 19%, 25% or an effective 26.5% in the marginal band, and the shareholder then pays dividend tax at 10.75%, 35.75% or 39.35% above the £500 allowance. Both dividend rates in the basic and higher bands rose by two percentage points on 6 April 2026, narrowing the advantage over salary without removing it.
What happens if I take a dividend and the company has no profit?
The dividend is unlawful, and it does not simply stand because the money has already left the account. In practice it gets reclassified as a loan from the company to you, which brings the director's loan rules into play: a section 455 charge payable by the company if the balance is still outstanding nine months and a day after the year end, a benefit-in-kind if the loan exceeds £10,000 and carries no commercial interest, and pressure to repay. Distributable profit means accumulated profit after corporation tax, not the balance showing in the bank, so check the figure before you declare rather than after.
