Taxes in the UK are at historic highs. And with a stagnant economy, it’s little wonder business owners are looking for advice about the optimum director salary in the next tax year.
Owners of limited companies can pay themselves in a few ways. Which way they choose makes a significant difference to their overall tax position. Most directors pay themselves with a mix of salary and dividends.
But getting the balance right is key to ensuring you’re not paying more tax than necessary. If you calculate things wrongly, you could end up paying more tax than you really need to. Tax planning is essential in business and it’s worth talking to experts to ensure you pay tax efficiently and without getting into problems with HMRC.
With dividend tax rates rising from April 2026 and some key thresholds frozen, planning the correct balance between salary and dividends is important. Let’s look at what the optimum director salary is for 2026-27.
Why the right director salary matters
As we have mentioned, the income of directors is usually taken as a mix of:
- A salary through PAYE, in the same way as an employee
- Dividends from the company’s profits
Each of these are taxed differently. Salaries are subject to Income Tax and National Insurance. Dividends, on the other hand, are paid from profits after Corporation Tax and are taxed at different dividend rates.
Despite what many people think, being paid only by dividends isn’t advisable. That is because salaries also provide at least one important benefit: they reduce the company’s taxable profit, meaning the company pays less Corporation Tax.
Because of this, the goal is usually to pay a salary that is high enough to use tax allowances, but low enough to minimise National Insurance payments.
What is the optimum director salary for 2026-27?
For directors of small, limited companies, the optimum director salary for 2026-27 will remain at £12,570 a year. This aligns with the personal allowance threshold. There are several reasons why this level of salary is the optimum salary:
- No Income Tax: Being paid this level means directors avoid paying Income Tax on the salary.
- No Employee National Insurance: The threshold also means that employees on an income of up to £12,570 pays no NI.
- State pension qualification: As the salary is above the ‘lower earnings’ limit of £6,708 you will receive a qualifying year towards state pension entitlement.
- Corporation Tax Relief: A salary is a deductible business expense, so paying a salary reduces the company’s Corporation Tax liability. Even though employer National Insurance may be payable on some of the salary, the Corporation Tax relief can often outweigh this cost. Remember, dividends are not tax deductible!
Employer National Insurance
Directors need to consider employer National Insurance (NI) contributions – a levy on businesses and other employers – when it comes to director salaries. It is currently charged at 15% on earnings above £5,000.
That means if a director takes a salary of £12,570, employer NI will be due on the portion above the £5,000 threshold. Although this creates an additional cost for the company, both the salary and employer NI are deductible for Corporation Tax purposes, which reduces the overall tax impact.
For many companies, this still results in an efficient overall tax position compared to taking the same income entirely as dividends. These are paid from company profits after Corporation Tax and are taxed at specific dividend rates.
Taking dividends and a director salary
As we’ve said, most directors take a mix of salary and dividends.
For 2026-27, the dividend allowance is £500. That means you can earn up to £500 without paying income tax. It has reduced significantly over the years.
The amount you pay once your payment exceeds this amount depends on your income band. But it will be anywhere between 10.75% and 39.35%!
Other ways to pay a director salary
While the payment mix we mention above is common, there are times when it isn’t the best solution.
For example, a different strategy may apply if you:
- Haveincome from other sources
- Are close to the£100,000 income threshold where the personal allowance starts to reduce
- Havemultiple companies
- Are making significantpension contributions
- Employ other staff and claim theEmployment Allowance
Because of this, it is always worth reviewing your director remuneration strategy each tax year.
What should I be paid?
If you are a director, then you might be looking at your circumstances and wondering about the best way to pay yourself and your company’s directors. The combination of salary and dividends we’ve mentioned may work. But what if it’s not that straight forward? One size doesn’t fit all, especially in business!
Reviewing your remuneration strategy could save your business considerable amounts in tax over time. As ever, it’s all about knowing your numbers. If you would like help reviewing your director salary, dividends, overall tax planning and your optimum director salary , contact our team today.
