Every UK limited company director eventually asks the same question: should I pay myself through PAYE, take dividends, or split the two? Get it wrong and you either overpay National Insurance or quietly wreck your State Pension record. Here is how the arithmetic works on 2026/27 rates.
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How each route is taxed
Salary is deductible against Corporation Tax, which is its biggest advantage. But it attracts employer National Insurance at 15% on everything above the £5,000 secondary threshold, employee National Insurance at 8% between £12,570 and £50,270 and 2% above, and Income Tax at 20%, 40% and 45%. The £12,570 personal allowance tapers away above £100,000 of income, creating a brutal effective 60% marginal rate between £100,000 and £125,140.
Dividends come from post-tax profit. Corporation Tax takes 19% on profits up to £50,000 and 25% above £250,000, with marginal relief producing an effective 26.5% on the band between. You then pay dividend tax at 10.75%, 35.75% or 39.35% (2026/27 rates) after the £500 dividend allowance — but no National Insurance whatsoever, on either side.
A worked example
A director wants £60,000 gross. As salary, the company spends about £68,250 including £8,250 of employer NIC. After £3,210 of employee NIC and £11,432 of Income Tax, roughly £45,400 lands in the director's account. As a dividend paid with no salary, distributing £60,000 needs around £76,500 of pre-tax profit once Corporation Tax in the 26.5% marginal-relief band is covered, and dividend tax of about £7,500 leaves roughly £52,500.
The dividend is more than £7,000 better on take-home, and this is why the low-salary-plus-dividends model is so common among contractors and small consultancies.
Why almost nobody takes salary alone
The standard approach is a small salary topped up by dividends. The salary is usually set around the National Insurance thresholds so that it creates a qualifying year for the State Pension without triggering meaningful contributions, and so that it remains deductible against Corporation Tax. Everything else comes out as dividends.
If your company qualifies for the Employment Allowance — £10,500 in 2026/27, unchanged from 2025/26 — the optimum salary can be considerably higher, because the allowance offsets up to that much employer NIC. A company whose only employee paid above the £5,000 secondary threshold is a single director does not qualify, which is exactly why one-person consultancies stick to a low salary while a company with two or more employed directors often pays more.