Low Salary + High Dividends: Is the Classic UK Tax-Planning Strategy Still Valid?

A practical 2026–2027 guide for Limited Company directors covering salary levels, Dividend Tax, Corporation Tax, National Insurance, Employment Allowance, retained profits, IR35 and worked examples

For many years, owner-directors of UK Limited Companies have taken money from their businesses through a familiar combination:

a relatively low PAYE salary, followed by dividends from the company’s remaining profits.

The strategy became popular because salary and dividends are taxed differently. Salary normally reduces the company’s taxable profit, but it can create Income Tax and National Insurance liabilities. Dividends do not attract National Insurance, but they are paid from profits remaining after Corporation Tax and may create a separate personal Dividend Tax liability.

The strategy remains legal and can still be tax-efficient in 2026–2027. However, the answer is no longer as simple as:

“Pay the smallest possible salary and take everything else as dividends.”

Dividend Tax rates increased from 6 April 2026, the Dividend Allowance remains only £500, employer National Insurance is charged at 15% above the £5,000 annual threshold, and profits within the Corporation Tax Marginal Relief band can face an effective marginal rate of 26.5%.

As a result, the most efficient salary may be higher than many directors expect. For a profitable company and a director with no other income, a salary of £12,570 may often produce a better overall result than a salary of only £5,000, even where the company must pay employer National Insurance.

The correct answer still depends on the director, the company and the wider household position.

The Verdict at the Beginning

The classic strategy remains valid, but it is better described as:

an appropriate PAYE salary, followed by legally available dividends, combined where suitable with employer pension contributions and other legitimate business payments.

It remains attractive because salary is normally deductible when calculating company profits, dividends do not normally attract employee or employer National Insurance, the director can control the timing and amount of dividends subject to company-law rules, the company can retain profits rather than distributing everything immediately, and employer pension contributions may provide another tax-efficient use of surplus company funds.

However, dividends are less attractive than they were in 2025–2026.

From 6 April 2026:

Basic-rate Dividend Tax: 10.75%
Higher-rate Dividend Tax: 35.75%
Additional-rate Dividend Tax: 39.35%
Dividend Allowance: £500

The basic rate increased from 8.75%, while the higher rate increased from 33.75%. The strategy is therefore still useful, but the salary-and-dividend balance must be recalculated rather than copied from a previous tax year.

Main 2026–2027 Figures

For England, Wales and Northern Ireland:

Personal Allowance: £12,570
Lower Earnings Limit: £6,708
Employee National Insurance Primary Threshold: £12,570
Employer National Insurance Secondary Threshold: £5,000
Upper Earnings Limit: £50,270
Employee National Insurance: 8% between the Primary Threshold and Upper Earnings Limit, then 2%
Employer National Insurance: 15% above £5,000

For dividends:

Dividend Allowance: £500
Basic-rate Dividend Tax: 10.75%
Higher-rate Dividend Tax: 35.75%
Additional-rate Dividend Tax: 39.35%

For Corporation Tax:

Small Profits Rate: 19%
Main Rate: 25%
Marginal Relief: potentially available for profits between £50,000 and £250,000

The Corporation Tax thresholds are reduced for short accounting periods and divided according to the number of associated companies.

The examples in this article assume the director is resident in England, Wales or Northern Ireland. Scottish taxpayers have different Income Tax rates on salary and other non-dividend income, although UK dividend rates continue to apply.

Salary and Dividends Are Taxed Differently

Salary

Salary is payment for the director’s work or office. The company must normally register as an employer, operate PAYE, report the salary through payroll, deduct Income Tax and employee National Insurance where applicable, and pay employer National Insurance where applicable.

A genuine salary and the related employer National Insurance are normally deductible when calculating the company’s taxable profit.

For example, if the company has £50,000 of profit before paying a £12,000 salary, the salary may reduce taxable profit to £38,000 before other adjustments.

Dividends

A dividend is paid because the recipient owns shares in the company. It is not salary and is not payment for performing work.

Dividends:

are not processed through PAYE;
do not normally attract National Insurance;
cannot be deducted when calculating Corporation Tax;
must be paid from distributable profits;
must follow the rights attached to the company’s shares.

The company therefore pays Corporation Tax before the remaining profit can be distributed as dividends.

This creates two possible levels of tax:

Corporation Tax paid by the company;
Dividend Tax paid personally by the shareholder.

Dividends may still be more efficient than additional salary because no employee or employer National Insurance normally applies, but they are not tax-free.

The Three Salary Levels Commonly Considered

There is no universal salary figure, but three amounts are likely to be discussed frequently in 2026–2027.

Option 1: Salary of £5,000

This equals the employer National Insurance Secondary Threshold.

At this level:

no employee National Insurance is normally due;
no employer National Insurance is normally due;
no Income Tax is normally due if the Personal Allowance is available;
the salary normally reduces company taxable profits.

However, £5,000 is below the Lower Earnings Limit of £6,708, so this salary alone will not normally provide a National Insurance qualifying year.

The director might still obtain a qualifying year through another employment, National Insurance credits or another route, but the £5,000 company salary does not achieve this by itself.

Option 2: Salary of £6,708

This reaches the annual Lower Earnings Limit.

At this level:

no employee National Insurance is normally payable;
the salary may count towards qualifying benefits and the State Pension record;
no Income Tax is normally payable if the Personal Allowance is available;
employer National Insurance arises on the amount above £5,000.

Employer National Insurance:

£6,708 − £5,000 = £1,708

£1,708 × 15% = £256.20

The company therefore pays a salary of £6,708 plus approximately £256.20 employer National Insurance, unless Employment Allowance covers the liability.

This may be a reasonable compromise where the director wants a National Insurance qualifying year without using the full Personal Allowance as salary.

Option 3: Salary of £12,570

This uses the full standard Personal Allowance and reaches the employee National Insurance Primary Threshold.

Assuming the director has no other income using the Personal Allowance:

no Income Tax is normally due;
no employee National Insurance is normally due;
the salary should support the National Insurance record;
the salary reduces company taxable profits;
employer National Insurance arises above £5,000.

Employer National Insurance:

£12,570 − £5,000 = £7,570

£7,570 × 15% = £1,135.50

For a sole-director company unable to claim Employment Allowance:

Salary: £12,570
Employer National Insurance: £1,135.50
Total company cost: £13,705.50

Although this appears more expensive than a £5,000 salary, the salary and employer National Insurance normally reduce taxable company profits. The director also receives more money before Corporation Tax rather than taking the same value through post-Corporation-Tax dividends.

Because Dividend Tax rates increased in April 2026, the £12,570 salary may be more attractive than it initially appears.

Is £12,570 Now the Best Salary?

For many profitable owner-managed companies, it may be, but it is not automatically correct for every director.

It may be attractive where:

the director has no other salary, pension or taxable employment income;
the full Personal Allowance is available;
the company has sufficient taxable profit and cash;
the director has been in office for the full tax year;
the salary is commercially reasonable;
no other circumstances materially alter the calculation.

The employer National Insurance cost should not be considered in isolation. The additional salary moves more money to the director before Corporation Tax, reduces the company’s taxable profit, reduces the amount later required as a taxable dividend, and may preserve the National Insurance record.

The result can be even more favourable where Employment Allowance is available.

Worked Comparison: £5,000, £6,708 and £12,570

Assume:

company profit before director salary and employer National Insurance: £45,000;
no associated companies;
Corporation Tax rate: 19%;
no other personal income;
full Personal Allowance available;
all remaining post-tax profit is legally distributed as dividends;
all taxable dividends remain within the basic-rate band;
no student loan or other special adjustment;
no Employment Allowance.

Figures are illustrative and rounded.

Option A: £5,000 Salary

Salary: £5,000
Employer National Insurance: £0
Company taxable profit: £40,000
Corporation Tax at 19%: £7,600
Dividend available: £32,400

Unused Personal Allowance:

£12,570 − £5,000 = £7,570

After the remaining Personal Allowance and £500 Dividend Allowance, taxable dividends are £24,330.

Dividend Tax:

£24,330 × 10.75% = £2,615.48

Total net personal cash:

£5,000 + £32,400 − £2,615.48 = £34,784.52

Option B: £6,708 Salary

Salary: £6,708
Employer National Insurance: £256.20
Company taxable profit: £38,035.80
Corporation Tax at 19%: approximately £7,226.80
Dividend available: approximately £30,809

Unused Personal Allowance:

£12,570 − £6,708 = £5,862

After the remaining Personal Allowance and Dividend Allowance, taxable dividends are approximately £24,447.

Dividend Tax:

£24,447 × 10.75% = approximately £2,628.05

Total net personal cash:

Approximately £34,888.95

This is approximately £104 more than the £5,000 salary and may also protect the director’s National Insurance record.

Option C: £12,570 Salary

Salary: £12,570
Employer National Insurance: £1,135.50
Company taxable profit: £31,294.50
Corporation Tax at 19%: approximately £5,945.96
Dividend available: approximately £25,348.55

The full Personal Allowance is used by the salary.

After the £500 Dividend Allowance, taxable dividends are approximately £24,848.55.

Dividend Tax:

£24,848.55 × 10.75% = approximately £2,671.22

Total net personal cash:

Approximately £35,247.33

In this simplified example, the £12,570 salary leaves the director approximately:

£462.81 better off than the £5,000 salary

despite the company paying £1,135.50 employer National Insurance.

This does not prove that £12,570 is always optimal. It shows why Corporation Tax relief and Dividend Tax consequences must be included alongside employer National Insurance.

What Changes if Employment Allowance Is Available?

Employment Allowance allows an eligible employer to reduce its employer National Insurance liability by up to £10,500 for 2026–2027.

However, a company is not eligible merely because it pays employer National Insurance.

A Limited Company normally cannot claim where:

it has only one director;
that director is the only employee creating an employer National Insurance liability.

Having other employees paid below the Secondary Threshold does not automatically solve the issue. At least one qualifying employee other than the sole director generally needs to create a secondary Class 1 National Insurance liability.

Where the company qualifies and the allowance covers the employer National Insurance, a salary of £12,570 can become substantially more attractive.

Using the earlier £45,000-profit example, if Employment Allowance fully offsets employer National Insurance, the approximate net personal amount under the £12,570 salary strategy may rise to around £36,068, subject to the exact accounting and tax treatment.

Eligibility must be checked each year rather than assumed from a previous claim.

How Dividend Tax Works

The director first uses any available Personal Allowance against taxable income.

The £500 Dividend Allowance then applies at a 0% Dividend Tax rate. However, the dividend still forms part of total income and uses tax-band capacity, potentially pushing further dividends into the higher-rate band.

Example: £30,000 Dividends

Assume a £12,570 salary has already used the entire Personal Allowance.

Dividend income: £30,000
Dividend Allowance: £500
Taxable dividends: £29,500

Dividend Tax:

£29,500 × 10.75% = £3,171.25

Under the 2025–2026 basic Dividend Tax rate of 8.75%, the same taxable dividend would have created £2,581.25 tax.

The April 2026 increase therefore adds:

£590

Example: £40,000 Dividends

Assume a £12,570 salary and £40,000 dividends.

After the £500 Dividend Allowance:

£37,200 is taxed at 10.75%;
£2,300 is taxed at 35.75%.

Tax:

£37,200 × 10.75% = £3,999

£2,300 × 35.75% = £822.25

Total Dividend Tax: £4,821.25

Once dividends enter the higher-rate band, the personal tax cost increases significantly.

Corporation Tax Must Be Allowed for Before Dividends

A common mistake is to calculate dividends using the company’s bank balance.

Cash in the bank is not the same as distributable profit.

Before paying a dividend, the company must consider:

current-year accounting profit;
retained profits or losses from earlier years;
Corporation Tax attributable to the profit;
accrued liabilities;
accounting adjustments;
whether current management accounts support the dividend.

A company could have £30,000 in the bank but accumulated losses of £10,000. The cash balance does not automatically permit a £30,000 dividend.

Dividends can only be paid from available distributable profits. An unlawful or unsupported dividend may become repayable or be treated through the director’s loan account.

Dividend Paperwork Is Required

To pay a dividend correctly, the company should normally:

review distributable profits;
formally approve the dividend;
retain directors’ meeting minutes or a written resolution;
prepare a dividend voucher;
provide the voucher to the shareholder;
retain a copy;
pay or credit the dividend according to the share rights.

The voucher should show:

the date;
company name;
shareholder’s name;
dividend amount.

These rules apply even where the director and shareholder are the same person.

Regular monthly withdrawals should not simply be relabelled as dividends at the end of the year. If the money was withdrawn before a valid dividend was declared, it may represent a director’s loan.

Salary Must Also Be Processed Properly

Director salary must normally be:

processed through PAYE;
reported to HMRC on a Full Payment Submission;
recorded in the company accounts;
properly paid or credited;
supported by payroll records and payslips.

Directors normally use an annual National Insurance earnings period rather than the ordinary employee calculation. Payroll software should identify the person correctly as a director.

A director appointed partway through the tax year may have pro-rated National Insurance thresholds, so a salary that works for a full-year director may produce a different result for someone appointed later.

National Minimum Wage and Directors

A director is generally an office holder, and the National Minimum Wage does not normally apply solely because they hold office.

However, a director may also be a worker or employee under a separate contract. Where that arrangement makes them a worker for National Minimum Wage purposes, minimum-wage rules may apply to the work performed under that contract.

The contractual arrangement and actual duties matter.

Situations Where the Classic Strategy May Work Differently

The Director Has Another Job or Pension

If the director already has salary, pension income or taxable benefits elsewhere, the Personal Allowance may already be used.

A salary from the company may therefore create PAYE Income Tax even if it is below £12,570.

All personal income must be considered.

The Company Has Low Profits or Losses

Salary may create or increase a company loss. That loss may have tax value, but the company may not receive an immediate Corporation Tax saving.

Dividends cannot be paid without sufficient distributable reserves.

Where profits are low, preserving cash may matter more than maximising theoretical extraction.

The Company Has Associated Companies

Associated companies reduce the Corporation Tax thresholds.

With two associated companies in total, the normal £50,000 and £250,000 thresholds may become £25,000 and £125,000 for each company, subject to accounting-period adjustments.

This may move a company into Marginal Relief or the 25% rate earlier and can increase the Corporation Tax value of deductible salary.

Income Exceeds £100,000

The Personal Allowance is reduced by £1 for every £2 of adjusted net income above £100,000 and disappears at £125,140.

Dividends count towards adjusted net income.

A director with salary, large dividends, rental income, interest or other taxable income may lose part or all of the Personal Allowance.

Pension contributions and Gift Aid may reduce adjusted net income in some circumstances.

High Income Child Benefit Charge

The High Income Child Benefit Charge can apply where adjusted net income exceeds £60,000.

Dividends count towards this calculation.

A dividend that appears tax-efficient in isolation may therefore create an additional Child Benefit charge.

IR35 Applies

The salary-and-dividend strategy does not override IR35 or the off-payroll working rules.

Where the relevant income is treated as employment income, PAYE and National Insurance may apply through a deemed employment payment.

Taking company money as dividends does not change the underlying employment-status result.

Other Income-Based Charges Apply

The result may change where the director has:

student or postgraduate loan deductions;
tax credits or means-tested benefits;
savings income;
rental income;
capital gains;
pension contributions;
charitable donations;
overseas income.

Director Is Over State Pension Age

A director above State Pension age may not pay employee National Insurance, depending on their circumstances, but the company may still owe employer National Insurance.

The correct payroll category must be used.

Dividends Between Spouses or Civil Partners

Where spouses or civil partners genuinely own shares, dividends may be distributed according to their legal share rights.

This may allow both people to use their:

Personal Allowances;
£500 Dividend Allowances;
basic-rate bands.

However, ownership must be genuine.

The company should consider:

beneficial ownership;
voting and capital rights;
dividend rights;
statutory registers;
share certificates;
share classes;
possible anti-avoidance rules.

Gifting or issuing shares can also create legal, Capital Gains Tax, inheritance, control and commercial consequences.

The company cannot simply pay one shareholder’s dividend into the other spouse’s bank account and treat it as the spouse’s income.

Can Different Shareholders Receive Different Dividends?

It depends on the legal rights attached to the shares.

If two shareholders each own 50 identical ordinary shares and the company declares £100 per share, each is entitled to £5,000.

The company cannot normally pay one £9,000 and the other £1,000 where their shares have identical rights.

Different dividends may be possible through correctly structured share classes, dividend waivers or other legal arrangements, but these require careful tax and legal review.

Should Profits Be Left in the Company?

Sometimes.

A director does not have to distribute every available profit.

Retaining profits can help the company:

fund working capital;
buy equipment;
employ staff;
survive quiet periods;
reduce borrowing;
finance expansion;
defer personal Dividend Tax.

However, retaining profit does not remove Corporation Tax. The company still pays tax on taxable profit even if no dividend is distributed.

Retained profits remain exposed to company risks and may influence future extraction costs, investment-company status, Business Asset Disposal Relief and estate planning.

Employer Pension Contributions as an Alternative

Where the director does not need immediate access to all the money, an employer pension contribution may be more efficient than additional salary or dividends.

A qualifying employer contribution may:

reduce taxable company profits;
avoid employee and employer National Insurance;
avoid immediate Income Tax for the director;
enter the pension as a gross contribution.

However:

annual allowance must be checked;
carry forward, tapering and MPAA may apply;
the payment must be commercially justifiable;
the money is normally inaccessible until pension rules permit withdrawal.

The most effective extraction strategy may therefore combine:

salary + dividends + employer pension contributions

Legitimate Business Expenses and Benefits

Before paying additional dividends, the company should ensure that genuine business costs have been paid or reimbursed correctly.

These may include, where conditions are satisfied:

business mileage;
travel and subsistence;
professional subscriptions;
business telephone costs;
homeworking expenses;
training connected with the trade;
pension contributions;
certain exempt benefits.

These are not replacements for salary or dividends. They must relate to genuine business expenditure and be properly evidenced.

Personal expenses paid by the company may instead create a taxable benefit, salary, distribution or director’s loan.

Why Dividends Remain Attractive

Despite higher rates, dividends still normally:

avoid employee National Insurance;
avoid employer National Insurance;
allow timing across personal tax years;
let profits remain in the company until needed;
allow genuine shareholders to receive dividends according to their share rights.

Once the director has used an appropriate salary, dividends often remain the natural way to withdraw additional distributable profit.

Above the Personal Allowance, salary can attract Income Tax, employee National Insurance and employer National Insurance. A dividend may therefore remain cheaper than additional salary, particularly within the basic-rate dividend band.

Why the Strategy Is Less Powerful Than Before

The main reasons are:

The Dividend Allowance is only £500.

Basic and higher Dividend Tax rates increased from April 2026.

Corporation Tax can reach 25%.

Employer National Insurance begins above only £5,000.

Frozen tax thresholds push more income into higher bands.

The strategy remains useful, but it is no longer an automatic answer for every owner-managed business.

A Better Way to Plan Director Remuneration

Instead of asking:

“What is the lowest salary I can pay?”

Ask:

How much personal cash is needed?
Does the director have other income?
Is the full Personal Allowance available?
Is a National Insurance qualifying year needed?
Can the company claim Employment Allowance?
What Corporation Tax rate applies?
Are there associated companies?
How much distributable profit exists?
Will dividends enter the higher-rate band?
Will adjusted net income exceed £60,000 or £100,000?
Could an employer pension contribution be better?
Is IR35 relevant?
Does the company need to retain cash?
Are salary and dividends documented correctly?

The correct answer is a calculation, not a slogan.

Practical Example: Director Wants £3,000 per Month

Suppose the director wants approximately £36,000 of personal cash during the year.

The company should not simply transfer £3,000 every month and decide later whether it was salary or dividends.

A better process is:

set an appropriate monthly PAYE salary;
prepare regular management accounts;
estimate Corporation Tax;
confirm distributable reserves;
declare interim dividends only when profits support them;
prepare vouchers and minutes;
record each payment correctly;
monitor total personal income;
reserve money for Self Assessment;
review the plan before 5 April and the company year-end.

Some months may contain salary only. Other months may include a separately declared dividend. The accounting records should identify each payment when made.

Common Mistakes

Using last year’s salary figure without recalculating: Dividend Tax rates changed on 6 April 2026.

Assuming £5,000 is automatically best: It avoids employer National Insurance but falls below the Lower Earnings Limit and may produce a lower net result than £12,570.

Ignoring Employment Allowance: Some companies qualify for up to £10,500, while many single-director companies do not.

Paying dividends from the bank balance: Cash is not the same as distributable profit.

Forgetting Corporation Tax: The company should reserve for Corporation Tax before calculating available dividends.

Taking monthly drawings and calling them dividends later: Unsupported withdrawals may become director’s loan transactions.

Paying unequal dividends on identical shares: Dividends must follow legal share rights.

Ignoring other personal income: Other earnings can change tax bands and Personal Allowance availability.

Assuming dividends avoid IR35: IR35 depends on the working arrangement, not the extraction method.

Withdrawing everything: The company still needs cash for VAT, PAYE, employer National Insurance, Corporation Tax, suppliers, wages, loans and unexpected expenses.

Checklist Before Setting the Director’s Salary

Check:

tax code and other income;
available Personal Allowance;
National Insurance qualifying-year requirements;
director appointment date;
Employment Allowance eligibility;
expected company profit;
Corporation Tax rate;
associated companies;
available distributable reserves;
expected dividends;
higher-rate and additional-rate exposure;
adjusted net income;
Child Benefit implications;
pension opportunities;
IR35 status;
company cash flow.

Checklist Before Paying a Dividend

Confirm:

the recipient is a shareholder;
the shares carry the correct dividend rights;
sufficient current or retained profits exist;
Corporation Tax has been allowed for;
management accounts are up to date;
directors approve the payment;
minutes are retained;
a dividend voucher is prepared;
the payment is recorded in the correct tax year;
the company remains able to pay its debts.

Verdict: The Strategy Still Works, but “Low Salary” Does Not Mean “The Lowest Possible Salary”

The classic strategy remains an important part of UK Limited Company tax planning.

A director can still legitimately receive:

a PAYE salary for their work

followed by

dividends from available company profits.

However, its advantages have reduced because the Dividend Allowance is only £500, the basic Dividend Tax rate is now 10.75%, the higher rate is now 35.75%, Corporation Tax can reach 25%, and frozen thresholds push more income into higher bands.

At the same time, a higher salary reduces company profit and Corporation Tax.

For many profitable sole-director companies, a salary of £12,570 may still be more efficient than £5,000, even after employer National Insurance.

For an eligible company using Employment Allowance, the case for a salary up to the Personal Allowance may be even stronger.

There is no universal figure. The answer changes where the director has another job or pension, high total income, Child Benefit, student loans, Scottish taxpayer status, State Pension age, a part-year appointment, IR35 exposure, a spouse who genuinely owns shares, employer pension opportunities or associated companies.

The Golden Rule

Do not choose the director’s salary by looking only at employer National Insurance. Calculate Corporation Tax, Income Tax, Dividend Tax, National Insurance and legal dividend capacity together.

How DCTaxAgent Can Help

DCTaxAgent can assist company directors with:

calculating an appropriate salary;
comparing £5,000, £6,708 and £12,570;
calculating employer and employee National Insurance;
checking Employment Allowance;
estimating Corporation Tax;
reviewing Marginal Relief and associated companies;
calculating distributable profits;
preparing dividend vouchers and minutes;
reviewing director’s loan accounts;
calculating personal Dividend Tax;
comparing salary, dividends and employer pension contributions;
processing payroll;
preparing accounts, CT600 and Self Assessment returns.

WhatsApp: 07587 532646
Website: www.dctaxagent.co.uk

Disclaimer

This article is intended for general, informational and educational purposes.

It does not constitute tax, legal, payroll, investment or financial advice tailored to an individual situation.

The correct strategy depends on company profitability, distributable reserves, Corporation Tax rates, associated companies, accounting periods, other personal income, tax codes, National Insurance records, Employment Allowance, share structure, IR35 status, pensions, student loans, Child Benefit, residence, Scottish taxpayer status and company cash flow.

Tax rules and rates can change.

The information reflects official HMRC and GOV.UK guidance available on 2 August 2026.

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