The Optimal Salary and Dividend Split for Directors in 2026-27

Bottom line: For most solo directors in 2026-27, pay yourself a salary of £12,570, take dividends up to £37,700 (filling the basic rate band), then direct any surplus profit into an employer pension contribution. This three-step formula is legal, HMRC-approved, and saves thousands compared to taking everything as salary.

Why this still works — even after the NI changes

In April 2025, employer National Insurance got more expensive. The rate went up from 13.8% to 15%, and the point where it kicks in dropped from £9,100 to £5,000. That means paying a £12,570 salary now costs your company an extra £656 a year in employer NI compared to two years ago.

Some accountants reacted by recommending a lower salary of £5,000 or even £0 to dodge employer NI entirely. For most directors, that's a mistake — and the numbers show why.

The maths behind the £12,570 salary

When your company pays you a salary, the whole cost — salary plus employer NI — is deducted from company profit before corporation tax is calculated. So HMRC effectively subsidises part of your wage bill.

At a salary of £12,570:

• Employer NI due: (£12,570 − £5,000) × 15% = £1,135.50
• Total cost to company: £12,570 + £1,135.50 = £13,705.50
• Corporation tax saving on that cost (at 19%): £13,705.50 × 19% = £2,604.05
• You personally pay zero income tax (below the £12,570 personal allowance)
• You personally pay zero employee NI (below the £12,570 Primary Threshold)

The CT saving alone more than justifies the salary. The £1,135.50 employer NI is partially offset by the CT deduction — the true net cost of employer NI is around £919 after tax relief. Still a real cost, but it doesn't change the fundamental logic.

Golden nugget: the £5,000 salary argument doesn't hold up

If you drop your salary to £5,000 to eliminate employer NI, you save £1,135. But you also lose the corporation tax deduction on the extra £7,570 of salary you're no longer paying — worth £7,570 × 19% = £1,438. You're £303 worse off, not better. The salary reduction only makes sense once your CT rate exceeds about 22% — which is the marginal relief band above £50,000 profit. Below that, £12,570 wins every time.

How dividends fit in

Once you've taken your salary, you extract the rest of your income as dividends. Dividends are paid from company profit after corporation tax — so the company has already paid CT on that money. Your personal tax rates on dividends are much lower than on salary:

With a £12,570 salary already in the picture, you can take up to £37,700 in dividends before you hit the higher rate. That's £50,270 total income — a substantial personal income with a combined tax bill of roughly £3,500–4,000 for the year.

Three scenarios: small, medium, and larger profits

Once you're above £80,000 profit, the conversation moves to pension contributions. Taking everything as higher-rate dividends is expensive — 33.75% on the dividend plus corporation tax already paid means a combined rate of roughly 50%. An employer pension contribution is a far better use of that surplus profit.

What actually changes year to year

The 2026-27 strategy is essentially unchanged from 2025-26. The employer NI changes happened in April 2025 and are now baked in. The personal allowance, basic rate band, and dividend allowance are all frozen. The only thing to review each year is whether your profit level has moved you between the small profits (19%), marginal (26.5%), or main rate (25%) CT bands — because that changes the pension decision.

Golden nugget: always declare dividends properly

Dividends must be declared by a board minute (which you can write yourself as sole director) and issued with a dividend voucher. Taking money from the company without doing this creates an "overdrawn director's loan account" — which HMRC can tax at 33.75% under Section 455. It's a common trap for directors who take informal withdrawals and forget the paperwork. Takes 10 minutes to do correctly.