When you run a limited company, you have flexibility in how you pay yourself that sole traders simply don't have. The most tax-efficient approach combines salary and dividends.
Why salary plus dividends?
Run the numbers yourself
As a director, you're both an employee and shareholder. Dividends are taxed at lower rates than salary and don't attract National Insurance — which is where the tax saving comes from.
The optimal salary for 2026/27
Most tax advisers recommend a salary of £12,570/year (£1,047.50/month) — the Personal Allowance. This means no Income Tax on the salary, minimal NI (enough to preserve State Pension), and the salary is deductible for Corporation Tax.
Dividends above the salary
Additional income can be taken as dividends. For 2026/27 the dividend allowance is £500 — the first £500 is tax-free. Above that: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate).
Important: dividends from profits only
You can only pay dividends if your company has made sufficient profit after Corporation Tax. Always record board minutes for each dividend payment.
How Fernside Accounting can help
We calculate the most tax-efficient combination for your specific circumstances. Get in touch to make sure you're not paying more tax than necessary.