This is for the owner of a limited company with one director and no other staff, deciding how to take money out in the 2026/27 tax year. It sets out how each route is taxed, then runs one worked example at three common salary levels. It is general information, not advice: your other income, pension and the company's profits change the answer, so check your own figures with an accountant.
How salary is taxed
Salary goes through payroll. The director pays income tax and employee National Insurance on it, and the company pays employer National Insurance. Salary and the employer National Insurance on it are business costs, so they reduce the company's taxable profit.
- Income tax: nothing up to the £12,570 personal allowance, then 20% in England, Wales and Northern Ireland (Scotland has its own bands).
- Employee National Insurance: nothing up to £12,570 a year, then 8% to £50,270. Directors use an annual earnings period.
- Employer National Insurance: 15% above £5,000 a year.
- Employment Allowance can't be used when the only employee paid above the secondary threshold is the sole director, so a one-person company pays that 15% in full.
- Salary from £6,708 a year (the lower earnings limit) up to £12,570 costs the director no National Insurance, and GOV.UK says contributions are treated as paid, which protects their National Insurance record for the State Pension.
How dividends are taxed
Dividends are paid from the company's profit after Corporation Tax. They are not a business cost, carry no National Insurance and are taxed on the shareholder at dividend rates.
| Band | Rate on dividends over the £500 allowance |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Dividends inside any unused personal allowance aren't taxed either. The company must not pay more in dividends than its available profits from this and earlier years, a directors' meeting declares each dividend, and each payment needs a dividend voucher. Corporation Tax is 19% on profits of £50,000 or less and 25% above £250,000, with marginal relief in between.
A worked example at three salary levels
Assumptions: a company with one director who owns all the shares, £50,000 of profit for the year before paying the director, a 12-month accounting period and no associated companies, so Corporation Tax is 19%. The director has no other income, lives outside Scotland, and the company pays out everything left after Corporation Tax as a dividend. Pension contributions and student loans are left out.
| Salary £5,000 | Salary £6,708 | Salary £12,570 | |
|---|---|---|---|
| Employer NI (15% over £5,000) | £0.00 | £256.20 | £1,135.50 |
| Corporation Tax (19%) | £8,550.00 | £8,176.80 | £6,895.96 |
| Dividend paid | £36,450.00 | £34,859.00 | £29,398.54 |
| Dividend tax | £3,050.85 | £3,063.43 | £3,106.59 |
| Income tax and employee NI on salary | £0.00 | £0.00 | £0.00 |
| Director keeps | £38,399.15 | £38,503.57 | £38,861.95 |
| Counts toward State Pension | No (below £6,708) | Yes | Yes |
In this example the £12,570 salary leaves the director £462.80 more than a £5,000 salary. Each extra pound of salary up to £12,570 costs 15p of employer National Insurance, but salary and that National Insurance both cut Corporation Tax at 19%, and the director pays no income tax or National Insurance on it. The same pound taken as a dividend would bear Corporation Tax first and then dividend tax.
When the answer changes
- If the company also employs someone else who earns above £5,000 a year, it may claim Employment Allowance, which can cover the employer National Insurance on the director's salary too.
- Above £12,570, salary picks up 20% income tax and 8% employee National Insurance, so for basic rate taxpayers dividends usually cost less from that point.
- Profits above £50,000 bring in marginal relief and a higher effective Corporation Tax rate, which makes salary more valuable as a deduction.
- Other income, such as a second job or rent, uses the personal allowance first and can push dividends into the higher rate band at £50,270 of total income.
- Scottish taxpayers pay Scottish income tax rates on salary above the personal allowance, which have more bands.
- Pension contributions paid by the company are another route, with their own rules and limits.
Paperwork for each route
Salary means running payroll: the company registers as an employer, sends an FPS each time it pays the director, pays the PAYE bill to HMRC and gives the director a payslip and, after the year, a P60. Dividends need board minutes and a voucher for each payment. Dividend tax is paid by the director, through Self Assessment or, for up to £10,000 of dividends, through a tax code change; GOV.UK says dividend income over £10,000 always needs a tax return.
Where PayDocs fits
PayDocs makes the director's payslip and year-end P60 from your payroll figures; it doesn't run payroll, file returns or produce dividend vouchers. PayDocs works out PAYE income tax, National Insurance and supported deductions for 2026/27 pay dates. A payslip for each salary payment keeps the director's pay record tidy alongside the company's dividend paperwork. You preview free and pay per payslip.
This is general information about UK rules for the 2026/27 tax year, as published on 8 October 2026. It is not tax or legal advice. The worked example uses stated assumptions; your own figures will differ.
Questions
Is salary or dividends better for a sole director?
It depends on profits and other income. In our 2026/27 example a £12,570 salary with the rest as dividends left more than a lower salary, because salary cuts Corporation Tax and carries no tax up to £12,570.
How are dividends taxed in 2026/27?
After the £500 dividend allowance and any unused personal allowance, at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band.
Can a sole director claim Employment Allowance?
No, if the director is the company's only employee paid above the secondary threshold. GOV.UK excludes that case, so a one-person company pays employer National Insurance on salary above £5,000.
Does a £5,000 salary count toward the State Pension?
No. In 2026/27 earnings need to reach the lower earnings limit of £6,708 a year to count toward the National Insurance record without paying contributions.
Do dividends count for National Insurance?
No. Dividends are paid to the director as a shareholder, so HMRC doesn't treat them as earnings for National Insurance. Only salary and bonuses are.
Sources
- GOV.UK: Tax on dividends
- GOV.UK: Tax on dividends, how to report
- GOV.UK: Corporation Tax rates and reliefs
- GOV.UK: Running a limited company, taking money out of a limited company
- GOV.UK: Expenses if you're self-employed (limited companies and allowable staff costs)
- GOV.UK: Rates and thresholds for employers 2026 to 2027
- GOV.UK: Employment Allowance, check if you're eligible
- GOV.UK: National Insurance classes
- HMRC National Insurance Manual: NIM12012, directors and dividends
Sources checked 8 October 2026. This article explains how pay documents work; it is not tax or legal advice.
