Knowing how to pay yourself as a limited company director is one of the first practical questions most directors face — and one that catches people out more often than it should. The principle is straightforward enough: take a modest salary, top up with dividends, and pay significantly less tax than you would as a sole trader or PAYE employee. But the numbers that make this work shift with each Budget, and getting them wrong can mean paying more National Insurance than necessary, or triggering unexpected personal tax bills.

For 2026/27, there are three salary levels worth understanding, a dividend allowance that has been trimmed to £500, and employer National Insurance changes that affect even single-director companies. We work through the numbers with directors regularly, and the right answer genuinely depends on your circumstances — but there are sensible defaults that suit most people, and we’ll walk through them here.

The efficiency of the combined approach comes down to one thing: dividends are not subject to National Insurance. Salary is. For a sole trader or PAYE employee, every pound earned above the Personal Allowance is hit with both Income Tax and National Insurance. For a director drawing a combination of low salary and dividends, the NI burden is dramatically reduced.

Your company also gets Corporation Tax relief on the salary it pays you — salary is a deductible business expense. Dividends, by contrast, come out of post-tax profits. So the calculus involves weighing the Corporation Tax saving from a higher salary against the NI cost of paying that salary. This is why there’s no single universally perfect answer: your personal tax position, whether you have other income, and whether there are other employees in the business all shift the optimal point.

What doesn’t change is the underlying logic. Keeping your salary in a band that minimises NI while maximising your personal allowance — and then drawing the remainder as dividends — is consistently the most efficient structure for the majority of limited company directors. The questions are how high to set the salary, and how to time the dividends.

For 2026/27, there are three salary levels that come up in almost every director pay conversation. Each has a different logic, and the right one for you depends on your situation.

£5,000 — the Secondary Threshold

This is the point at which employer National Insurance kicks in. Below £5,000, your company pays no employer NI at 15%. Above it, the company pays 15% on everything over that threshold. For a sole director with no other employees, a salary of exactly £5,000 means zero employer NI liability — which keeps the company’s costs clean and simple.

£6,500 — the Lower Earnings Limit

Paying yourself £6,500 (the Lower Earnings Limit for 2026/27) means the tax year counts as a qualifying year for State Pension and benefit entitlements, without triggering any employee National Insurance contributions. There’s a small employer NI cost above £5,000, but many directors consider the State Pension protection worth it.

£12,570 — the Primary Threshold

Taking your salary up to the full Personal Allowance of £12,570 uses your entire income tax-free band for salary income. Employee NI applies at 8% on earnings between £12,570 and £50,270, but there’s no Income Tax on this salary. Employer NI of 15% applies on the portion above £5,000. This level works best when the Corporation Tax saving from a higher salary deduction outweighs the NI cost — which it often does, but it’s worth modelling both ways.

Once your salary is set, dividends cover the rest of what you need to draw from the business. For 2026/27, the dividend allowance is £500 — meaning the first £500 of dividend income above your Personal Allowance is tax-free. Beyond that, dividend tax applies at rates that are lower than equivalent Income Tax rates but are not negligible.

For basic rate taxpayers in 2026/27, the dividend tax rate is 10.75%. Higher rate taxpayers pay 35.75%, and those in the additional rate band pay 39.35%. To work out which rate applies to you, your dividend income is stacked on top of your other income — salary, rental income, any savings income — so if your salary already uses part of the basic rate band, your dividends may start in what remains.

In practical terms, a director taking a £12,570 salary and drawing dividends up to the higher rate threshold of £50,270 would have roughly £37,700 of space remaining in the basic rate band (salary uses £12,570 of the £50,270 limit). Dividends up to that point would be taxed at 10.75% after the £500 allowance is used.

It’s worth noting that dividends must be declared lawfully: the company needs to have sufficient distributable profits, the correct paperwork (board minutes and dividend vouchers) needs to be in place, and dividends must be paid proportionally to shareholding unless you have different share classes. Getting this wrong turns a dividend into something HMRC treats very differently.

Employment Allowance can offset employer National Insurance — but for many directors, it’s not available. If you’re a sole director and the only employee of your company liable for secondary Class 1 National Insurance, you cannot claim Employment Allowance. This is a common point of confusion, particularly for contractors who assume the allowance applies automatically.

The position changes if your company takes on another employee who earns above the Secondary Threshold (£5,000 for 2026/27). Once a second person is earning above that level, the company becomes eligible for Employment Allowance for the full tax year. This is worth keeping in mind if you’re considering bringing a spouse, partner, or employee onto the payroll — the NI saving can be meaningful.

If your circumstances change during a tax year — say you hire someone who then leaves — HMRC’s rules allow the allowance to apply for the full year in which eligibility existed, but you should stop the claim from the following year. The mechanics of stopping the claim involve updating the Employment Allowance indicator in your payroll software and submitting an Employment Payment Summary to HMRC.

For most single-director companies, the practical upshot is simple: employer NI on salary above £5,000 is a real cost, and the optimal salary level should account for it — which is exactly why £5,000 is often the cleanest choice for directors without other employees.

We see the same mistakes repeat themselves, and most of them are avoidable with a small amount of planning.

Drawing dividends without sufficient profits. Dividends can only be paid from distributable reserves — retained profits after Corporation Tax. Drawing more than the company has made is an illegal dividend, which HMRC may reclassify as a loan or salary with full tax and NI implications. Always check the company’s profit position before declaring a dividend.

Ignoring Self Assessment. If your total income exceeds £100,000, or you receive more than £10,000 in dividends in a tax year, you’ll need to file a Self Assessment return. Many directors assume that running payroll is enough — it isn’t. The dividend tax is reported and paid through Self Assessment, usually by 31 January following the end of the tax year.

Forgetting the Personal Allowance taper. If your total income exceeds £100,000, your Personal Allowance reduces by £1 for every £2 earned above that threshold — disappearing entirely at £125,140. At that point, the effective marginal tax rate on income in that band is 60%. This is worth planning around, not ignoring.

Not keeping board minutes. Each dividend payment should be supported by a board minute approving it and a dividend voucher. These don’t need to be elaborate documents, but they do need to exist.