If you run a limited company, you need to decide how much to pay yourself and how to record each payment. Moving money from the business account into your personal account is only part of the process.
A director who also owns shares can receive a salary, dividends or a combination of both. The right balance depends on company profits, other personal income and the tax costs for both the business and the director.
This guide explains how director salary and dividends work for the 2026/27 tax year, from 6 April 2026 to 5 April 2027. The example illustrates the rules rather than recommending one salary for everyone.
How Salary and Dividends Differ
A salary pays you for your work. A dividend pays you as a shareholder.
Being a director does not automatically entitle you to dividends. You must hold shares with the relevant dividend rights.
The main differences are:
| Point to compare | Salary | Dividends |
| Basis of payment | Work performed for the company | Share ownership |
| Payment records | Payroll records and payslips | Dividend approvals and vouchers |
| Personal tax | Income Tax may apply | Dividend tax may apply |
| National Insurance | Employee and employer contributions may apply | Generally no National Insurance |
| Available profits | Not subject to the dividend profit limit | Must be supported by available profits |
The company must document payments correctly. Dividends cannot exceed available profits from the current and previous financial years. GOV.UK explains the rules for taking money out of a limited company.
Paying Yourself a Director Salary
A director salary should go through payroll. The company calculates any deductions, provides the payroll records and reports the payment to HMRC.
Directors have special National Insurance rules. Contributions are generally based on annual earnings, even when the director receives monthly payments.
Payroll software can use an annual calculation or an alternative method with a year-end adjustment. The correct setup matters, particularly if you become a director during the year or receive irregular payments. See HMRC’s director National Insurance guidance.
For 2026/27, these standard annual thresholds are relevant:
| Threshold | Annual amount |
| Standard Personal Allowance | £12,570 |
| Employee National Insurance primary threshold | £12,570 |
| Employer National Insurance secondary threshold | £5,000 |
| National Insurance lower earnings limit | £6,708 |
For a director on standard category A rates, employer National Insurance is normally 15% above the secondary threshold. These are full-year figures, and different circumstances can change the calculation. HMRC’s 2026/27 employer rates.
This means a salary can create an employer National Insurance bill even when the director has no employee National Insurance to pay.
Why £12,570 Is Not Automatically the Right Salary
The standard Personal Allowance is £12,570, but it applies to your total relevant income. You do not receive a separate allowance for each job or company.
Another salary or pension may already use some or all of it. The allowance also reduces when adjusted net income exceeds £100,000. Scottish Income Tax bands differ for salary income.
Your company’s position matters too. A salary paid wholly and exclusively for the business will generally qualify for a tax deduction, subject to the relevant rules. HMRC considers the purpose of remuneration when deciding whether it is deductible.
A useful comparison therefore looks at:
- Your other income and available allowances.
- The company’s payroll costs.
- Any available Corporation Tax relief.
- Employment Allowance eligibility.
- How much money you need personally.
- The cash the business needs to retain.
Choosing a salary simply because another director uses it can overlook these differences.
Check Whether Employment Allowance Applies
Employment Allowance can reduce an eligible employer’s National Insurance bill by up to £10,500 per tax year. It offsets qualifying employer contributions rather than increasing your personal tax allowance.
A company with one director cannot claim if that director is the only employee liable for employer Class 1 National Insurance.
Having another person on payroll does not automatically establish eligibility. Their pay and the other conditions still matter.
Confirm this before deciding your salary. An incorrect assumption can leave the company with an unexpected payroll bill.
Check Profits Before Taking Dividends
Your bank balance does not tell you how much dividend the company can pay.
Some cash may be needed for tax, supplier invoices or other commitments. Review up-to-date accounts and allow for Corporation Tax and accumulated losses before establishing the available profit.
For each dividend, keep the approval minutes and prepare a voucher. The voucher should identify the company, recipient, date and amount. Keep a copy and give one to the shareholder.
Dividends do not reduce the company’s Corporation Tax bill. GOV.UK’s dividend payment requirements.
As a practical routine, review profit and cash together. A dividend may be supported by the accounts but still leave too little cash for upcoming bills.
Dividend Tax Rates for 2026/27
The dividend allowance is £500 for 2026/27. Dividend income within any unused Personal Allowance can also be tax-free.
Above the available allowances, the rates are:
| Tax band | Dividend tax rate |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Your other income affects which rate applies. A dividend payment may cross more than one band. HMRC’s current dividend tax rates.
Keep money aside for this personal tax. The amount arriving in your bank account is not necessarily the amount available to spend.
A Director Salary and Dividends Example
Assume a director in England receives a £12,570 salary and £20,000 in dividends during 2026/27.
They have no other income, retain their full Personal Allowance and have no student loan deductions or other adjustments. They are a director for the full year on standard National Insurance rates.
The company has sufficient distributable profits after its costs and Corporation Tax.
| Personal income calculation | Amount |
| Annual salary | £12,570 |
| Dividends received | £20,000 |
| Total income | £32,570 |
| Salary Income Tax | £0 |
| Employee National Insurance | £0 |
| Dividends taxed after the £500 allowance | £19,500 |
| Dividend tax at 10.75% | £2,096.25 |
| Income remaining after these personal taxes | £30,473.75 |
Separately, if Employment Allowance is unavailable, the company’s employer National Insurance would be:
(£12,570 − £5,000) × 15% = £1,135.50
That makes the salary and employer National Insurance cost £13,705.50, before any Corporation Tax relief.
This calculation uses the 2026/27 payroll thresholds and dividend rates. It does not calculate the company’s Corporation Tax or prove that this combination produces the lowest overall tax bill.
Keep Salary and Dividend Payments Separate
Use clear payment references and record each transfer when it happens.
For example, label a payroll transfer with the relevant salary month. Record a dividend against its approval and voucher.
Avoid transferring a regular amount and deciding months later how to classify it. Money taken outside properly recorded salary, dividends or other valid payments may need to be treated as a director’s loan, with separate tax consequences. GOV.UK’s guidance on company withdrawals.
A short monthly review helps keep the records usable. Check payroll, reconcile the bank account and update the profit position before considering another dividend.
Report Dividend Income to HMRC
Salary reporting through payroll does not remove your responsibility to report taxable dividends.
If you already complete a Self-Assessment return, include your dividend income. Dividend income above £10,000 requires a Self-Assessment return.
For smaller amounts, the reporting route depends on your circumstances. Where tax is due and you do not already file a return, HMRC may collect it through your tax code or another reporting arrangement.
Keep your dividend vouchers together with your salary records. This makes it easier to prepare the return and check the figures.
Review Your Pay When Circumstances Change
Your salary and dividend plan should reflect the business you are running now.
Review it if profits fall, you start another job, another shareholder joins or the company takes on employees. A change in personal spending needs is also a reason to revisit the figures.
Before the next tax year, ask for a comparison based on the same company budget. It should show the company’s costs, the personal tax and the amount you retain.
This gives you a clearer basis for choosing how to pay yourself.
Get Help With Director Pay
If you are unsure how much salary or dividends to take, contact RMA Accountants to discuss your company accounts and personal income.
Bring your latest payroll figures, dividend records and details of any other earnings. These help establish what the company can afford and which options need comparing.
