Salary vs Dividends: The Optimal Split for Compa

When I was running Kaizen, I spent the first two years paying myself a straight salary. My accountant nearly fell off his chair when he found out. I was handing HMRC thousands of pounds a year that I didn’t need to. The moment we restructured how I took money out of the business, I kept an extra £7,000 to £8,000 annually. Same revenue, same lifestyle, less tax.

If you’re a limited company director and you’re not thinking carefully about how you pay yourself, you’re almost certainly overpaying. The difference between the right structure and the wrong one can be £5,000 to £10,000 a year. That’s not a rounding error. That’s a holiday, a chunk off your mortgage, or a serious ISA contribution.

Why the split matters

As a company director, you have a choice that employees don’t. You can pay yourself through a combination of salary and dividends, and each is taxed differently.

Salary is subject to income tax and National Insurance (both employee and employer contributions). Dividends are taxed at lower rates and carry no National Insurance at all. The gap between these two is where the savings live.

Get it right and you keep more of what your business earns. Get it wrong and you’re effectively volunteering to pay tax you don’t owe.

The optimal salary level for 2026/27

The first decision is how much salary to take. There are two main approaches.

Option 1: £12,570 (the personal allowance). Taking a salary equal to the personal allowance means you pay zero income tax on it. You will pay employee National Insurance (8% above the NI primary threshold of £12,570), so at this exact figure, your NI bill is nil. Your company also avoids employer NI on earnings below the secondary threshold (£9,100 for 2026/27). This is the most common approach and the one most accountants recommend.

Option 2: £9,100 (the secondary NI threshold). If you want to avoid employer NI entirely, you could set your salary at £9,100. This keeps you below the employer NI threshold, saving the company 13.8% on the difference. The trade-off is that you don’t fully use your personal allowance through salary, though depending on your other income sources, this may not matter.

For most directors, £12,570 is the sweet spot. You use your full personal allowance, pay no income tax on the salary, and the employer NI cost on the portion between £9,100 and £12,570 is relatively small (around £479 a year).

Dividend tax rates for 2026/27

Once you’ve taken your salary, the rest comes out as dividends. Here’s what you’ll pay:

Dividend allowance: £500 tax-free
Basic rate (up to £50,270): 8.75%
Higher rate (£50,271 to £125,140): 33.75%
Additional rate (over £125,140): 39.35%

Compare that to the equivalent income tax and NI rates on salary: 20% income tax plus 8% employee NI plus 13.8% employer NI at basic rate. The dividend route is significantly cheaper at every level.

Worked example: £80,000 company profit

Let’s make this concrete. Your company has £80,000 in profit before your pay. Here’s how the numbers look under two scenarios.

Scenario A: salary and dividends (optimal split)

Salary: £12,570

Income tax: £0 (within personal allowance)
Employee NI: £0 (at the threshold)
Employer NI: ~£479 (on the £3,470 between £9,100 and £12,570)

Corporation tax on remaining profit (£80,000 - £12,570 - £479 = £66,951): £66,951 x 25% = £16,738

Dividends available: £66,951 - £16,738 = £50,213

Tax on dividends:

First £500: £0 (dividend allowance)
Next £37,200 (up to the basic rate band): 8.75% = £3,255
Remaining £12,513 (higher rate): 33.75% = £4,223

Total tax paid: £0 + £0 + £479 + £16,738 + £3,255 + £4,223 = £24,695

Take-home: ~£55,305

Scenario B: all salary

Salary: £80,000

Income tax: £13,486 (20% on £37,700 + 40% on £29,730)
Employee NI: £4,396 (8% on £37,700 + 2% on £29,730)
Employer NI: £9,247 (13.8% on £67,430)

Total tax paid: £13,486 + £4,396 + £9,247 = £27,129

But remember, the employer NI is an additional cost to the company. So the real cost is even higher. The company needs to find £89,247 to give you £80,000 in salary.

Take-home: ~£62,118 but the company has spent £89,247 to get you there.

The salary and dividend route saves the company over £9,000 in total tax and NI costs on the same underlying profit. That’s real money.

Pension contributions: the most tax-efficient route of all

Here’s where it gets really powerful. Your company can make pension contributions directly into your workplace pension or a SIPP (Self-Invested Personal Pension). These contributions are:

A deductible business expense (reducing corporation tax)
Not subject to income tax for you
Not subject to National Insurance for either you or the company

If your company puts £10,000 into your pension, that’s £10,000 off the corporation tax bill (saving £2,500 at 25%) and you pay zero tax receiving it. Compare that to taking £10,000 as dividends, where you’d pay corporation tax first and then dividend tax on top.

For anyone building towards financial independence or early retirement, maxing out employer pension contributions is the single most tax-efficient way to extract value from your company. The annual allowance is £60,000 (including employer contributions), and you may be able to carry forward unused allowance from the previous three years.

I wish I’d been more aggressive with pension contributions from Kaizen earlier on. I got there eventually, but those first couple of years of paying myself a straight salary and ignoring the pension route cost me tens of thousands in unnecessary tax.

When to use a SIPP

If your workplace pension scheme is limited in its investment options (or you don’t have one set up), a SIPP gives you full control. Your company contributes directly, and you choose where to invest: index funds, ETFs, individual shares, whatever suits your investment strategy.

The tax treatment is identical to a workplace pension. The only difference is you’re choosing the provider and the investments yourself. For company directors, a SIPP is often the better option because you’re both the employer and the employee. You control the contributions.

The practical steps

Set your salary at £12,570. Pay it monthly through PAYE. Register as an employer with HMRC if you haven’t already.
Pay dividends from post-tax profits. You need a board meeting minute (even if you’re the only director) and a dividend voucher for each payment. Your accountant will handle this.
Contribute to your pension from the company. Make these as employer contributions, not personal contributions. The tax treatment is better.
Review annually. Tax thresholds change. The optimal split for 2026/27 may not be the same for 2027/28. Have this conversation with your accountant every April.

Don’t overthink it, but don’t ignore it

This isn’t about aggressive tax avoidance or dodgy schemes. It’s about using the structure that HMRC provides and paying what you owe, not a penny more. Every company director has access to this. The ones who use it properly keep more of their money. The ones who don’t are subsidising those who do.

If you’re running a limited company and haven’t had this conversation with your accountant, book a meeting this week. One hour could save you thousands a year for as long as you run the business.

Salary vs Dividends: The Optimal Split for Company Directors