How to Pay Yourself as a Director in 2026/27 (Without Overpaying Tax)

If you run a limited company, one of the biggest advantages you have is control over how you pay yourself.

But with that flexibility comes a common question: Salary, dividends, or both - what actually makes sense?

The short answer is, it’s usually a mix.

The better answer is, it depends on your situation - and getting it slightly wrong can cost you thousands.

Let’s break it down. Here are the 3 Ways to Take Money Out of Your Company:

1. Salary (PAYE) - regular income through payroll.

2. Dividends - paid from profits after Corporation Tax.

3. Expenses / reimbursements - not income - but still reduce your tax bill.

Most directors use a combination of the first two.

Salary and Dividends - What’s the Difference?

Salary

- Counts as a business expense → reduces Corporation Tax

- Subject to Income Tax and National Insurance

- Helps build State Pension entitlement

- Looks better for mortgages / lenders

Dividends

- Paid from post-tax profits only

- No National Insurance

- Lower tax rates than salary

- More admin (board minutes, paperwork, etc.)

The Typical Strategy (And Why It Works)

Take a low salary + top up with dividends

Why?

- Salary uses your tax-free allowance and reduces Corporation Tax

- Dividends are taxed more efficiently and avoid National Insurance Contributions

What Salary Should You Take as a Director in 2026/27?

Key figures:

- £5,000 → no employer NIC

- £6,708 → qualifies for State Pension

- £12,570 → full Personal Allowance used

How Dividends Are Taxed (2026/27)

- First £500 → tax-free

- Then:

10.75% (basic rate)

35.75% (higher rate)

39.35% (additional rate)

How Much Can You Take Tax-Free?

If you have no other income:

£12,570 salary

+ £500 dividends

Total: £13,070 tax-free

Common Mistakes

- Paying dividends without profits

- Missing dividend paperwork

- Ignoring National Insurance thresholds

- Forgetting other income

Final Thought

The goal isn’t to avoid tax. It’s to pay the right amount, in the right way, at the right time.

Jing Zhao FCCA, 21 May '26