For most UK limited company directors, £12,570 is the optimal salary for 2026/27.
This figure equals the personal allowance, meaning zero income tax and zero employee NI. It also builds National Insurance credits towards your state pension. The only cost is £1,136 in employer NI (15% on the amount above the £5,000 secondary threshold), which is fully deductible against corporation tax.
From 6 April 2026, dividend tax rates increase by 2 percentage points. Basic rate rises from 8.75% to 10.75%. Higher rate rises from 33.75% to 35.75%. This makes salary more attractive relative to dividends, and pensions even more so. For the full 2026/27 extraction stack — salary, pension sacrifice, spousal rebalancing, and the £100k trap — see our owner-manager salary and dividend planning guide.
Quick Summary: What's Changing in 2026/27
Action Required Before 5 April 2026
If you have retained profits and want to take dividends at current rates (8.75% basic, 33.75% higher), declare them before 6 April 2026. After that date, the new higher rates apply.
The Dividend Tax Changes Explained
The Autumn Budget 2025 announced increases to dividend tax rates from 6 April 2026. This is separate from the employer NI changes that took effect in April 2025.
| Tax Band | 2025/26 | 2026/27 | Extra Tax per £10k |
|---|---|---|---|
| Basic Rate (up to £50,270) | 8.75% | 10.75% | +£200 |
| Higher Rate (£50,270-£125,140) | 33.75% | 35.75% | +£200 |
| Additional Rate (£125,140+) | 39.35% | 39.35% | No change |
The £500 dividend allowance remains unchanged. This means the first £500 of dividends is still tax-free regardless of which tax band your other income puts you in. For a full breakdown with worked examples, planning strategies, and a dividend tax calculator to model your specific salary and dividend mix, see our UK dividend tax 2026/27 guide.
Salary Strategies for 2026/27
The good news: the optimal salary calculation doesn't change dramatically. The £12,570 strategy remains best for most directors. In fact, the case for taking salary is now stronger because dividends are taxed more heavily. For detailed analysis of the three salary strategies, see our 2025/26 optimal salary guide.
The Three Salary Options for 2026/27
There are three commonly used salary levels for director pay. Each has different tax consequences and is suited to different circumstances.
| Option | Amount | Income Tax | Employee NI | Employer NI | State Pension | Best For |
|---|---|---|---|---|---|---|
| NI Secondary Threshold | £5,000 | £0 | £0 | £0 | No credit | Minimal admin, multiple directorships |
| Lower Earnings Limit | £6,500 | £0 | £0 | £225 | Qualifies | State pension credit without employee NI |
| Personal Allowance | £12,570 | £0 | £0 | £1,136 | Qualifies | Most directors (recommended) |
2026/27 Tax Rates Summary
Salary Taxation
- Personal allowance: £12,570
- Employee NI threshold: £12,570
- Employer NI: 15% from £5,000
Dividend Taxation
- Allowance: £500
- Basic rate: 10.75%
- Higher rate: 35.75%
Why £12,570 Salary Is Now Stronger
With dividends taxed more heavily, the trade-off between salary and dividends shifts further in favour of salary (up to the personal allowance).
Consider the choice: extract £12,570 as salary or as dividends?
- As salary: Zero income tax (within personal allowance), zero employee NI, employer NI of £1,136. Net cost to company: £13,706.
- As dividends: Corporation tax first (19%), then dividend tax at 10.75%. On £12,570 pre-tax profit: £2,388 corp tax, £1,094 dividend tax. You receive: £9,088.
Salary wins clearly. The employer NI (£1,136) is deductible for corporation tax and far cheaper than the combination of corporation tax plus dividend tax.
Worked Example: £80,000 Profit Extraction
Let's compare 2025/26 and 2026/27 for a director with £80,000 company profit to extract, taking £12,570 salary in both scenarios.
| Item | 2025/26 | 2026/27 | Difference |
|---|---|---|---|
| Gross Profit | £80,000 | £80,000 | - |
| Director Salary | £12,570 | £12,570 | - |
| Employer NI | £1,136 | £1,136 | - |
| Corporation Tax | £12,596 | £12,596 | - |
| Dividends Taken | £53,698 | £53,698 | - |
| Dividend Tax | £4,655 | £5,720 | +£1,065 |
| Net Take Home | £61,613 | £60,548 | -£1,065 |
Bottom line: With £80,000 profit, you'll take home £1,065 less in 2026/27 than 2025/26 due to the dividend tax increase. That's £89 per month less in your pocket.
Why Pensions Are Now More Attractive
With dividends taxed more heavily, the relative advantage of pension contributions increases. Here's the comparison for extracting £10,000:
| Extraction Method | Company Cost | Tax Paid | You Receive |
|---|---|---|---|
| Dividend (basic rate) | £12,346 | £3,421 | £8,925 |
| Dividend (higher rate) | £12,346 | £5,921 | £6,425 |
| Employer Pension | £10,000 | £0* | £10,000+ |
*Pension contributions are tax-free going in. You pay income tax when you withdraw (at your marginal rate in retirement), but 25% comes out tax-free.
For a higher-rate taxpayer, employer pension contributions now deliver £3,575 more value than taking the same amount as dividends. That's the corporation tax saving (£2,346) plus the avoided dividend tax (£3,575), minus the eventual retirement tax (estimated lower due to 25% tax-free).
Read our full guide on pension contributions for directorsKey 2026/27 Tax Benchmarks
Optimal Director Salary 2026/27
Personal allowance threshold - zero income tax, qualifies for NI
Tax Saving £12,570 vs £9,100 Strategy
Annual saving by taking £12,570 salary instead of £9,100
Dividend Tax Basic Rate 2026/27
Increased by 2% from April 2026 (was 8.75% in 2025/26)
Dividend Tax Higher Rate 2026/27
Increased by 2% from April 2026 (was 33.75% in 2025/26)
Action to Take Before 5 April 2026
If you have retained profits in your company, consider whether to take some dividends before the deadline. Here's a framework:
Pre-April 2026 Checklist
Check your retained profits
You can only declare dividends from available profits. Check your accounts or ask your accountant for your reserves position.
Calculate the tax band impact
Don't push yourself from basic rate into higher rate just to beat the deadline. The 2% saving doesn't justify a jump to 35.75%.
Consider pension contributions first
Before taking dividends, maximise employer pension contributions. They're more tax-efficient than dividends at any rate.
Document properly
Dividends require board minutes and dividend vouchers. Make sure documentation is dated before 5 April 2026.
The £100k Tax Trap Gets Worse
If your total income exceeds £100,000, your personal allowance starts to taper away. For every £2 of income above £100k, you lose £1 of personal allowance. This creates an effective 60% marginal tax rate between £100,000 and £125,140.
With higher dividend rates, this trap becomes more expensive. If you're near this threshold, consider:
- Pension contributions to bring your adjusted net income below £100k. This restores your personal allowance and avoids the 60% trap.
- Spreading income across tax years if possible. Take some dividends in 2025/26 (lower rates) and defer some to 2026/27.
- Charitable donations via Gift Aid, which extend your basic rate band and reduce your adjusted net income.
Frequently Asked Questions
What is the optimal director salary for 2026/27?
For most directors, £12,570 remains optimal in 2026/27. This uses your full personal allowance with zero income tax. With dividend rates rising to 10.75%, the case for taking salary up to the personal allowance is actually stronger, as the alternative (dividends) is now taxed more heavily.
How much will dividend tax increase in 2026/27?
From 6 April 2026, dividend tax rates increase by 2 percentage points: basic rate rises from 8.75% to 10.75%, and higher rate rises from 33.75% to 35.75%. The additional rate (39.35%) and the £500 dividend allowance remain unchanged.
Should I take more dividends before April 2026?
Only if you have sufficient retained profits and won't push yourself into a higher tax band. Taking £10,000 extra dividends before April 2026 saves £200 in basic rate tax (2% on £10,000). But don't sacrifice pension contributions or cash reserves just to beat the deadline.
Are pensions more tax-efficient than dividends in 2026/27?
Yes, the gap widens in 2026/27. Employer pension contributions save corporation tax (up to 25%), avoid employer NI (15%), and aren't taxed as income. Dividends are now taxed at 10.75-35.75%. For higher-rate taxpayers especially, pensions become significantly more attractive.
What salary do I need for state pension in 2026/27?
You still need to earn at least the Lower Earnings Limit (expected to remain around £6,400-£6,500) to qualify for a state pension year. The exact figure for 2026/27 will be confirmed by HMRC. Taking £12,570 salary easily covers this requirement.
How much more tax will I pay in 2026/27 vs 2025/26?
On £30,000 of dividends at basic rate: £600 more (2% increase). On £30,000 at higher rate: £600 more. The impact depends on your total dividend amount and which tax bands they fall into. Use our calculator to see your specific situation.
Summary: Your 2026/27 Strategy
Ready to review everything in one go? Our annual tax review checklist for limited company directors covers salary, dividends, pensions, DLA, and year-end planning in a single printable checklist.
Plan Your 2026/27 Tax Strategy
The tax landscape is getting more complex. Our chartered accountants can review your situation and recommend the optimal combination of salary, dividends, and pension contributions for the new tax year.