Director's Salary Guide for 2026/27:
Dividend Tax Just Went Up. Here's How That Changes Your Director's Salary
I help directors navigate this question every tax year, how much salary should you take from your limited company?
For 2026/27, the salary thresholds are unchanged. But dividend tax rates have jumped 2 percentage points across the board, and that changes the calculation.
The Dividend Tax Increase You Need to Know About
From 6 April 2026, dividend tax rates increased:
- Basic rate: 8.75% → 10.75%
- Higher rate: 33.75% → 35.75%
- Additional rate: unchanged at 39.35%
In real terms, that’s an extra £20 in tax for every £1,000 of dividends above your £500 allowance. If you’re extracting £50,000 in dividends at the basic rate, you’re paying roughly £990 more this year than last.
The salary-plus-dividends approach is still more tax-efficient than taking everything as salary but the margin has narrowed. Getting your salary level right matters more than ever.
Key Thresholds for 2026/27
- Personal Allowance: £12,570
- Employer’s NI Threshold: £5,000
- Employee’s NI Threshold: £12,570
- Lower Earnings Limit (State Pension): £6,708
- Employment Allowance: £10,500
- Dividend Allowance: £500
Your Two Main Options
Option 1 Low salary, no National Insurance: £5,000 per year (£416.67 monthly)
This is the clean, low-maintenance choice.
Your salary is fully deductible against corporation tax, there’s no PAYE or NI to pay over monthly, and admin is minimal. It maximises the cash available in the company for dividends.
The trade-off is that £5,000 falls below the Lower Earnings Limit of £6,708, so this year won’t count as a qualifying year towards your State Pension.
With the employer NI threshold sitting at £5,000 since April 2025 and the loss of State Pension credit at this level, I expect more directors to move to Option 2 this year.
Option 2 Optimise the Personal Allowance: £12,570 per year (£1,047.50 monthly)
This is generally the most tax-efficient option overall, and the one I’d recommend for most directors.
Your salary matches the Personal Allowance, so there’s no income tax. The employee NI threshold is also £12,570, so there’s no employee NI either. You get full corporation tax relief on the salary, and the year counts towards your State Pension.
The company does pay employer’s NI but let’s look at the actual numbers.
| Option 1 (£5,000) | Option 1 (£5,000) | |
|---|---|---|
| Annual salary | £5,000 | £12,570 |
| Income tax | £0 | £0 |
| Employee's NI | £0 | £0 |
| Employer's NI | £0 | £1,135.50 |
| Total cost to company | £5,000 | £13,705.50 |
| Corporation tax saving (at 25%) | £1,250 | £3,426.38 |
| Net cost after corp tax relief | £3,750 | £10,279.13 |
| State Pension qualifying year | No | Yes |
The difference in net cost between the two options is £6,529.13 per year. But that £6,529 is money going directly into your pocket as tax-free personal income rather than sitting in the company waiting to be taxed as dividends at 10.75% or higher. It also buys you a State Pension qualifying year.
If you have employees and qualify for the £10,500 Employment Allowance, that £1,135.50 employer NI cost drops to zero making Option 2 a straightforward win.
When You Should Talk to Your Accountant
Options 1 and 2 cover most sole directors with straightforward affairs. But there are situations where a different approach may save you more:
Your income is approaching £100,000. Once income exceeds £100,000, you lose £1 of Personal Allowance for every £2 over. This creates an effective marginal rate above 60%. A larger salary strategy might actually be more efficient here, your accountant can model the numbers.
You’re claiming R&D tax credits. A higher salary feeds into the R&D calculation as qualifying staff costs. Setting your salary too low could mean leaving money on the table.
You have other employees. The Employment Allowance (£10,500 for 2026/27) can wipe out your employer NI bill entirely. If you’re not claiming it, check your eligibility, you need at least one employee or two directors earning above the £5,000 secondary threshold.
You’re planning to buy or remortgage a property. Lenders look at salary when assessing affordability. A £5,000 annual salary doesn’t tell a great story on a mortgage application, even if your total income through dividends is much higher. If property plans are on the horizon, a higher salary now can save you headaches later.
The Bottom Line
For most sole directors, £12,570 is the strongest choice for 2026/27. No personal tax, no employee NI, full corporation tax relief, and a qualifying year towards your State Pension. The employer NI cost of £1,135.50 is comfortably outweighed by the benefits.
If simplicity is your priority and you’re happy with the State Pension trade-off, £5,000 keeps things minimal.
And with dividend tax now at 10.75% at the basic rate, it’s worth having a proper conversation with your accountant about your overall extraction strategy, not just salary in isolation.
Need your director’s payroll set up for 2026/27?
At Intelligent Payroll, we get directors live on payroll within two weeks. Whether you’re setting up for the first time or switching from another provider, we’ll make sure everything is compliant and running smoothly from day one.
Get in touch today, call us on 0161 524 7696 or email hello@intelligentpayroll.co.uk.