With the 2026/27 tax year underway, company directors once again need to decide how to extract income in the most tax-efficient way. Traditionally, this has meant a low salary topped up with dividends… but recent changes to employer National Insurance have made things a bit more nuanced.
While tax efficiency is still important, it’s no longer the only factor to consider. In many cases, the “best” option depends just as much on your personal circumstances, cashflow needs and future plans as it does on the tax numbers.
This guide explains the updated position for 2026/27 and explores the wider considerations to help you make a well-rounded decision.
What’s Changed for 2026/27?
From April 2025, employer’s National Insurance:
- Increased to 15%
- Now applies from just £5,000
This means that for companies without Employment Allowance (typically single-director companies), paying a salary up to the personal allowance (£12,570) now creates a real cost for the business.
As a result, the “optimal” salary is no longer one-size-fits-all.
Recommended Salary
If your company can claim Employment Allowance
We suggest that each director receives a salary of £12,570 per year (£1,047.50 per month).
Why this amount?
- Uses your personal allowance (no income tax)
- No employee National Insurance
- Counts towards your state pension
- Employer’s NI is covered by Employment Allowance
- Corporation tax relief available on salary
If your company cannot claim Employment Allowance (e.g. sole director)
You have two main options:
Option 1
- Maximum tax efficiency
- Salary: £5,000 per year
- No employee or employer NI
- More income extracted as dividends
Option 2
- Preserve state pension entitlement
- Salary: £6,500 per year
- No employee NI
- Small employer NI cost
- Counts towards your state pension
We’re happy to advise on which option suits your situation best.
Why not just take £12,570 in all cases?
From April 2025, Employers’ National Insurance increased to 15% and applies from just £5,000 of earnings.
So if Employment Allowance isn’t available, paying £12,570 creates a real cost for the company.
Simple Example (Single Director, No Employment Allowance)
| Salary | Employer NI | Comment |
| £12,570 | ~£1,135 | Extra cost to the company |
| £6,500 | ~£225 | Small cost, keeps NI record |
| £5,000 | £0 | Most tax-efficient |
Employment Allowance – Can You Claim It?
The Employment Allowance lets eligible employers reduce their employer’s NI bill by up to £10,500.
To qualify:
- You must have at least two employees or directors earning above £5,000
- Your employer’s NI bill must be under £100,000
- Only one company in a group can claim it
If eligible, we’ll apply this automatically through payroll.
What About Dividends?
Once you’re paying a tax-efficient salary, the rest of your income is usually taken as dividends.
For 2026/27:
- Dividend allowance: £500
- Basic rate dividend tax: 10.75%
- Higher rate dividend tax: 35.75%
Example – Salary vs Dividend Mix
Assume £50,000 total income extracted from the company.
Example A – £12,570 salary + dividends
- Salary: £12,570 (no income tax or employee NI)
- Dividends: £37,430
- Tax on dividends (basic rate): approx £3,970
Net pay retained: £46,028
Total cost to company: £51,135 or £50,000 with EA claim
Example B – £5,000 salary + dividends
- Salary: £5,000
- Dividends: £45,000
- Tax on dividends (basic rate): approx £4,800
Net pay retained: £46,030
Total cost to company: £50,000
Option C – £50,000 salary (no dividends)
- Salary taxed via PAYE
- No personal tax return required
Net pay retained: £39,521
Total cost to company: £56,750
Subscribe to our blog
Other Factors to Consider
1. Mortgage and Borrowing
One of the biggest real-world considerations is how your income appears to lenders. While accountants tend to focus on tax efficiency, mortgage providers are far more interested in consistency and reliability of income.
Salary is generally viewed as stable, contracted income, whereas dividends can be treated more cautiously. Some lenders will consider dividends in full, but others may average them over multiple years or exclude them entirely. This can lead to situations where a director earning £50,000 via a salary/dividend mix is assessed very differently from someone earning the same amount purely as salary.
If you plan to apply for a mortgage or refinance in the near future, a higher salary may increase your borrowing capacity and simplify the application process. Even where dividends are accepted, lenders often require two or three years of consistent history, which can be restrictive for newer businesses.
In practice, we often see clients temporarily increase their salary ahead of a mortgage application, even if it is not the most tax-efficient approach. The additional borrowing capacity or reduced complexity can easily outweigh the additional tax cost.
2. Pension Contributions
Pension planning is another area where salary levels can have an impact. While employer pension contributions are not restricted by salary (they are based on company profits), personal pension contributions are limited by your “relevant earnings”, which means salary, not dividends.
If you are drawing a low salary (for example £5,000), your ability to make personal pension contributions is significantly reduced. This may not matter if you are relying solely on employer contributions, but it does limit flexibility.
For directors who want to build personal pension savings, or who are using pensions as part of a wider tax-planning strategy, a slightly higher salary may be beneficial. Even moving from £5,000 to £12,570 increases the amount you can contribute personally without restriction.
This is particularly relevant for higher earners or those catching up on pension savings, where maximising contributions can be a key objective.
3. Payments on Account and Cashflow
A dividend-heavy approach can often result in higher personal tax bills and the creation of payments on account. These are advance payments towards the following year’s tax bill, typically due in January and July.
For many directors, this is less about the total tax paid and more about timing. The January payment, in particular, can feel disproportionately large, as it often includes both the balancing payment for the previous year and the first payment on account for the next year.
In contrast, a higher salary results in tax being deducted through PAYE in real time. This spreads the tax burden more evenly across the year and can make personal cash flow easier to manage.
We often find that clients who initially favour the dividend route for tax reasons later reconsider once they experience payments on account for the first time. A slightly higher salary can reduce or eliminate these, making finances feel more predictable.
4. Statutory Benefits and Entitlements
Your salary level can affect your entitlement to certain statutory benefits, such as Statutory Sick Pay, maternity or paternity pay.
These entitlements are based on earnings thresholds, so very low salaries may result in reduced or no entitlement. While this may not be a concern for all directors, it is an important consideration for those planning a family or who want to ensure a basic level of protection.
A salary around or above the Lower Earnings Limit helps maintain eligibility for state pension credits, but higher thresholds apply for some benefits. This means that a very low salary strategy, while tax-efficient, may reduce access to support if it is needed.
This is not always a deciding factor, but it is worth being aware of, particularly for younger directors or those whose circumstances may change.
5. Simplicity and Administration
There is also a practical side to consider. A salary-only approach is generally simpler to manage, with tax deducted automatically through payroll and fewer ongoing decisions required.
A dividend-based approach requires:
- Sufficient company profits
- Dividend declarations
- Supporting paperwork (even if informal)
While this is not overly complex, it does introduce an additional layer of administration and requires a bit more discipline around timing and record-keeping.
For some directors, particularly those who prefer a “set and forget” approach, the simplicity of a higher salary can outweigh the tax savings from a more complex structure.
Practical Tips
- Don’t focus on tax in isolation… consider your wider goals
- If you’re planning a mortgage, speak to us before setting your salary
- Review your position annually, as the “best” option can change
- Make sure dividends are only taken from available profits
Call to Action
If you’re unsure which approach is right for you, we can run the numbers based on your expected income and plans for the year.
Get in touch with BBK Accounts and we’ll help you find the right balance between tax efficiency and practicality with a personal tax review.
FAQs
It depends on whether your company can claim Employment Allowance.
If you have two directors or employees earning above £5,000, the most tax-efficient salary is usually £12,570, as the employer’s National Insurance is covered by the allowance.
If you’re a sole director, a lower salary (typically £5,000 or £6,500) is often more efficient, as employer’s National Insurance now starts at a much lower level and at a higher rate than in previous years.
For most small company directors, a combination of salary and dividends is still the most tax-efficient approach.
However, the gap between salary and dividends has narrowed over time, especially with:
- Higher dividend tax rates
- Increased employer’s National Insurance
In some cases, taking a higher salary can make sense… particularly for mortgage applications, cashflow stability, or reducing payments on account.
This used to be the default recommendation, but things changed from April 2025.
Employer’s National Insurance now:
- Applies from £5,000
- Is charged at 15%
So if your company can’t claim Employment Allowance, paying £12,570 creates an extra cost for the business of around £1,100+ per year… without increasing your personal take-home income.
Yes… but not as much as they used to.
Dividends are still generally more tax-efficient because:
- They don’t attract National Insurance
- They are taxed at lower rates than salary
However, with dividend tax now at 10.75% (basic rate) and 33.75% (higher rate), the advantage has reduced.
The decision is no longer just about tax… other factors like mortgages, pensions and cashflow often play a big role.
Yes, in most cases you can adjust your salary during the year.
For example, you might:
- Increase your salary ahead of a mortgage application
- Reduce it if profits are lower than expected
- Adjust your dividend strategy based on company performance
It’s always best to speak to your accountant before making changes, as timing and thresholds can affect the overall tax position.
