Director salary
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The personal allowance for 2026/27 remains at £12,570. Setting your director salary at exactly this amount means you pay zero income tax on the salary. You also qualify for a National Insurance credits year, which counts towards your state pension entitlement. The employer NI cost on a £12,570 salary is £1,136 (15% on the amount above the £5,000 secondary threshold), and this is fully deductible against corporation tax.

After salary and employer NI are deducted as business expenses, the remaining gross profit is subject to corporation tax at 19% (on profits up to £50,000) or 25% (above £250,000), with marginal relief applying between these thresholds. Post-tax profit can then be distributed as dividends.

In 2026/27, the first £500 of dividends is covered by the dividend allowance and is tax-free. Beyond that, dividends are taxed at 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers. Even with the 2026 increase, dividends remain significantly cheaper than taking the equivalent as salary once you have used up your personal allowance.

Employer pension contributions are the single most tax-efficient way to extract profit. They are deductible against corporation tax, exempt from employer NI, and not subject to dividend tax. The annual allowance is £60,000 for most people. For a higher-rate taxpayer, a £10,000 pension contribution delivers roughly £3,575 more value than the same amount taken as dividends.

If your total adjusted income exceeds £100,000, your personal allowance is reduced by £1 for every £2 above that threshold, creating an effective marginal rate of around 60% on income between £100,000 and £125,140. It is often worth capping total income below £100,000 and leaving the remainder in the company for future extraction or pension contributions.