Optimal payment structure for directors in 2026/27

What is the most tax-efficient approach for a director to remunerate themselves in 2026/27?

For many directors of UK limited companies, deciding how to pay themselves is one of the most important tax planning decisions each year. The most common options are salary through PAYE, dividends, or a combination of both.

For the 2026/27 tax year, the general advice for most small company directors remains the same: a modest salary combined with dividends. However, recent changes to dividend tax rates and National Insurance thresholds mean it’s important to review the numbers carefully and, importantly, the optimal salary will depend on whether you are a sole director (therefore with no Employment Allowance entitlement) or a multi-director/employee company (therefore with the Employment Allowance entitlement).

Below we outline the key considerations for directors when planning their remuneration.

1. Understanding Salary

A salary is paid through PAYE and is treated as an expense for the company. This means it reduces the company’s taxable profit and therefore reduces corporation tax.

For the 2026/27 tax year:

• Personal Allowance: £12,570

• Employee National Insurance threshold: £12,570

• Employer National Insurance threshold: £5,000

• Employer NI rate: 15% above the £5,000 threshold

Many directors choose to set their salary around the personal allowance level of £12,570, meaning no income tax is payable and employee National Insurance is typically avoided.

Even though employer National Insurance applies above the £5,000 threshold, this cost is deductible for corporation tax, which can still make this level of salary efficient overall.

If the company receives Employment Allowance, then up to £10,500 of Ers NIC is offset.

Salary provides additional benefits:

• Counts towards State Pension qualifying years

• Provides a deductible business expense

• Can support mortgage applications due to regular income.

2. Understanding Dividends

Dividends are payments made to shareholders from post-tax company distributable profits. Unlike salary, dividends are not subject to National Insurance.

However, dividends are taxed personally once received. For the 2026/27 tax year:

• Dividend allowance: £500 tax-free

• Basic rate dividend tax: 10.75%

• Higher rate dividend tax: 35.75%

• Additional rate: 39.35%

3. The Common Strategy: Salary + Dividends

For many owner-managed businesses, the most tax-efficient approach is typically:

• Salary: around £12,570

• Dividends: the remainder of income

This structure:

• Uses the personal allowance efficiently

• Minimises National Insurance contributions

• Allows dividends to be taxed at lower rates than salary within the basic rate band

For example, directors may take £12,570 salary and dividends up to the basic rate limit of £37,700, giving total income of about £50,270 before higher rate tax applies.

4. When a Different Strategy Might Be Better

While the salary-plus-dividend model works for many companies, it is not always optimal. Directors should consider their wider financial position, including:

• Other personal income (employment, rental income, pension income, etc.)

• Student loan repayments

• Pension contributions

• Whether the company qualifies for Employment Allowance

• Plans to retain profits in the company for future investment

Each of these factors can affect the most tax-efficient structure.

If you would like advice on this or any other topic, please get in touch - we would love to hear from you.