Last updated: 19 October 2026 · Written by Axel
For most one-person limited companies in 2026/27, the answer to salary vs dividends is both: a small salary through payroll, with the rest taken as dividends from profit that has already paid corporation tax. Salary is a business cost that cuts the company's corporation tax bill. Dividends are not, and you can only pay them out of profits the company actually has. Where you set the salary matters more than most people think, and the old habit of paying yourself £5,000 is no longer automatically the best choice.
This is a corporation tax decision as much as a personal tax one, so it's worth working through both sides before you set up payroll for the year.
How each option is taxed
Salary goes through PAYE. To pay one, GOV.UK says the company must register as an employer, deduct Income Tax and National Insurance, and pay employer's National Insurance on top. In return, salary paid to a director for their work is deductible when the company works out its taxable profit.
Dividends are a share of profit. GOV.UK is blunt on two points:
- "You cannot count dividends as business costs when you work out your Corporation Tax."
- Your company "must not pay out more in dividends than its available profits from current and previous financial years."
So a dividend comes out of money that has already been taxed at company level. If the company hasn't made the profit, there's nothing legal to pay out, however much is sitting in the bank.
The 2026/27 numbers that matter
These are the figures for 6 April 2026 to 5 April 2027, from HMRC's rates and thresholds for employers and the tax on dividends page:
| Item | 2026/27 figure |
|---|---|
| Personal Allowance | £12,570 |
| Secondary threshold (employer NI starts) | £5,000 a year |
| Lower earnings limit | £6,708 a year |
| Primary threshold (employee NI starts) | £12,570 a year |
| Employer NI rate above secondary threshold | 15% |
| Employee NI rate, primary threshold to £50,270 | 8% |
| Employment Allowance | £10,500 |
| Dividend allowance | £500 |
| Dividend tax: basic / higher / additional rate | 10.75% / 35.75% / 39.35% |
| Corporation tax: profits of £50,000 or less | 19% |
| Corporation tax: profits over £250,000 | 25% |
The employer thresholds and Employment Allowance are the same as 2025/26, apart from the lower earnings limit, which rose from £6,500 to £6,708. The dividend rates are the ones GOV.UK states for 2026/27, and they are higher than many older guides quote, so check any spreadsheet you inherited.
The catch with Employment Allowance
Employment Allowance would wipe out up to £10,500 of employer's NI, which changes the maths completely. But GOV.UK's eligibility rules say that if your company has only one director, they "must not be the only employee liable for secondary Class 1 National Insurance".
In plain terms: a one-person company can't claim it. If you employ someone else on payroll above the secondary threshold, you probably can, and a higher director salary can then make sense. That second case is one to model properly, not guess.
A worked example: £45,000 of profit
Assumptions, so you can see where the numbers come from:
- One director, who is the only shareholder and the only employee, so no Employment Allowance.
- £45,000 profit before paying the director anything, so the company stays in the 19% band.
- No associated companies, a 12-month accounting period, and no other personal income.
- Director taxed under England, Wales or Northern Ireland bands, standard Category A National Insurance.
- Everything left after corporation tax is paid out as a dividend in the same tax year.
| Approach | Employer NI | Corporation tax | Director's NI and Income Tax | Dividend tax | Director takes home | Total tax |
|---|---|---|---|---|---|---|
| Salary £12,570, rest dividends | £1,136 | £5,946 | £0 | £2,671 | £35,247 | £9,753 |
| Salary £5,000, rest dividends | £0 | £7,600 | £0 | £2,615 | £34,785 | £10,215 |
| No salary, all dividends | £0 | £8,550 | £0 | £2,513 | £33,937 | £11,063 |
| All salary (£39,783) | £5,217 | £0 | £7,620 | £0 | £32,163 | £12,837 |
How the top row works:
- Salary of £12,570 costs the company £1,135.50 in employer's NI (15% of the £7,570 above £5,000). The director pays no NI and no Income Tax on it.
- Profit falls to £31,294.50. Corporation tax at 19% is £5,945.96, leaving £25,348.54 to pay as a dividend.
- The salary has used the Personal Allowance, so after the £500 dividend allowance, £24,848.54 is taxed at 10.75%: £2,671.22.
What the example tells you
On these assumptions, a £12,570 salary beats £5,000 by about £460 a year. The reason is simple: each extra pound of salary between £5,000 and £12,570 costs 15% employer's NI, but the salary and the NI both come off profit taxed at 19%, and the director pays nothing on that slice. Taken as a dividend instead, the same money pays corporation tax first and then 10.75% once the allowances are used up.
Two more things worth knowing:
- £5,000 sits below the lower earnings limit of £6,708. GOV.UK says that for employees earning between £129 and £242 a week, contributions "are treated as having been paid to protect your National Insurance record". A £5,000 salary doesn't get you that protection; £12,570 does.
- All salary is the worst option here. Paying everything through payroll avoids corporation tax but costs far more in NI.
This isn't a universal answer. Profits over £50,000 bring in marginal relief, a second employee changes the Employment Allowance position, and other income can push your dividends into the 35.75% band. Run your own numbers each year.
Timing: rules that only apply to directors
Directors get a few rules that ordinary employees don't, and they give you a lot of freedom over when you pay yourself.
National Insurance is worked out over the whole year
For a normal employee, NI is checked against weekly or monthly thresholds, so one big payment in one month gets hit hard. Directors are different. HMRC's National Insurance Manual says a director's earnings period "is normally the year in which the earnings are paid". Mark yourself as a director in your payroll software and it works NI out on the yearly total.
That's why the table above holds however you pay. £12,570 in one go costs the same as £1,047.50 a month: no NI for you and £1,135.50 employer's NI for the company.
GOV.UK also lists company directors among the people not entitled to the minimum wage, so a single yearly payment isn't a problem on that front either.
One lump sum: pay it at the end of the tax year, not the start
Income Tax works differently. A normal 1257L tax code builds up your Personal Allowance month by month, so the date of a lump sum matters:
- Paid in month 12 (March, before 5 April): the full £12,570 allowance has built up, so no tax is taken.
- Paid in month 1 (April or May): only one month's allowance and one month's basic rate band are available, so close to £4,000 is deducted. You only get it back through later payroll runs or your Self Assessment.
Either way, it still goes through payroll and is reported to HMRC on or before the day you pay it.
Book it now, take the cash later
For directors, salary counts as paid on the earliest of three dates: when the money moves, when you become entitled to it, or when it's credited in the company's books. HMRC's Employment Income Manual says this applies even to "an account on which the director is not free to draw", and that "a written note in a minute book or its computer equivalent" is enough.
In practice, that means:
- Credit the salary to your director's loan account. From that day it counts as paid, so it goes on payroll and the PAYE due goes to HMRC on the normal timetable.
- The company now owes you that money. Draw the cash whenever the bank balance allows, with no more tax to pay.
- For corporation tax, salary you've recorded by the year end can still come off that year's profit, but only if it's paid within 9 months of the year end. A credit to your loan account counts as paid. Miss the 9 months and, under section 1288 of the Corporation Tax Act 2009, "the deduction for it is allowed for the period of account in which it is paid" instead.
Dividends work the same way, with one useful difference. HMRC's Company Taxation Manual treats an interim dividend, the usual kind the directors decide on, as paid when it's actually paid or "placed unreservedly at the disposal" of the shareholder, normally when it's credited to their account in the books. A final dividend voted by the shareholders can be given a later payment date, and that later date is when it counts as paid. You can use that to move a dividend into the next tax year.
The line you can't cross is backdating. The entry has to be made at the time, with minutes, and with enough profit behind it. Recording it now and paying the cash later is fine. Paying now and writing the paperwork up as if it happened months ago is not.
Your own Self Assessment and dividend records
The company side is only half of it. Dividends above your unused Personal Allowance and the £500 dividend allowance have to be reported to HMRC, and for most owner-directors that means a Self Assessment return. For the 2025/26 tax year, which ended on 5 April 2026, the online return and payment are both due by 31 January 2027.
On the paperwork, GOV.UK says that for every dividend you must:
- hold a directors' meeting to declare it and keep minutes, even if you're the only director
- write a dividend voucher showing the date, company name, shareholder names and amount
- give the shareholder a copy and keep one for the company
Do it at the time, not in a panic at year end. Money you take out that isn't salary, a dividend or a repaid expense is a director's loan, which brings its own records and tax rules.
When you genuinely need an accountant
Most single-director companies with steady profits can follow the logic above. Get proper advice if:
- profits sit between £50,000 and £250,000, where marginal relief makes the corporation tax rate harder to work out
- there are several shareholders, a spouse on the payroll or different classes of shares
- your total income is near £100,000, where your Personal Allowance starts to shrink
- you've already taken more than the company's available profits, or your director's loan account is overdrawn
- you want employer pension contributions in the mix
The accounts at year end should match all of this: salary in the profit and loss account, dividends deducted from reserves. If you're not sure how that looks, our guides to micro-entity accounts and filing a CT600 yourself cover it, and Companies House deadlines explained shows when it's all due.
Quick answers
Frequently Asked Questions
01Is it better to take salary or dividends from a limited company?
For most single-director companies in 2026/27, a mix is better than either on its own. A salary up to £12,570 is deductible against corporation tax and free of personal tax, then dividends come out of what's left after corporation tax.
02Can I pay myself dividends if my company made a loss?
No. Dividends can only come from available profits from current and previous years. Paying one anyway leaves you with money that isn't properly a dividend, which causes problems at year end.
03Can I pay my director's salary as one lump sum?
Yes. Directors' National Insurance is worked out over the whole year, so one payment costs the same NI as twelve monthly ones. Pay it in March, before 5 April, so your full Personal Allowance has built up on your tax code and no Income Tax comes off.
04Can I record my salary now and take the money later?
Yes. For a director, salary counts as paid once it's credited in the company's books, such as your director's loan account, so PAYE is due from then and you can draw the cash later. For corporation tax, it must be paid or credited within 9 months of the year end to come off that year's profit.
05Do dividends reduce my company's corporation tax?
No. GOV.UK states plainly that dividends are not a business cost for corporation tax. Salary and employer's NI are deductible; dividends are paid from profit after tax.
06Do I need a Self Assessment return if I only take dividends?
If your dividends go above your unused Personal Allowance and the £500 dividend allowance, you have to report them to HMRC. For most directors taking regular dividends, that means filing a Self Assessment return each year.
07Can my one-person company claim Employment Allowance?
No. If the director is the only employee liable for employer's National Insurance, the company can't claim it. Once you employ someone else above the secondary threshold, it's worth checking again.
Once the year is done, the salary and dividends you've taken need to land correctly in your company accounts and CT600, and those still have to be filed on time to avoid late filing penalties. A.X.E.L Filing prepares your micro-entity accounts and CT600 together and submits them to Companies House and HMRC with your own Government Gateway login, for £49 (dormant companies £20, amendments £29). It's software, not an accountant, so if any of the situations above apply, get advice first. Otherwise, start your company's return or see how it works.
A.X.E.L Filing
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