Tax Planning for High-Earning Company Directors
Take a company with £60,000 of profit available before the director is paid a penny. Pay the director entirely in salary, and by my calculation they take home about £41,200. Pay the same director a sensible salary plus dividends, and they take home about £46,100. That's a gap of nearly £4,900 a year, for exactly the same business, doing exactly the same work. And since 6 April 2026, the gap has quietly shifted again.
I've sat across the desk from a lot of company directors in Tunbridge Wells, Tonbridge and Sevenoaks over the years, and the question I hear most often is some version of "how should I actually pay myself?" Nobody is born knowing the answer. It's a decision that sits right at the point where company law, income tax, National Insurance and Corporation Tax all meet, and the rates behind it have moved in each of the last few years. So let's go through it properly: how salary works, how dividends work, what genuinely affects the choice, and why the "best" answer keeps changing.
A salary is paid through payroll, with tax and National Insurance handled through PAYE, and it's a deductible expense for your company. That last part matters. Every pound of salary reduces the profit your company pays Corporation Tax on, which is something a dividend can never do, because dividends are paid out of profit that has already been taxed.
The personal allowance is £12,570, so salary up to that level attracts no income tax. Employee National Insurance doesn't start until £12,570 either, so there's nothing to pay personally at that level. The catch sits on the company's side. Employer's National Insurance is charged at 15% on salary above the £5,000 secondary threshold, which means a £12,570 salary costs the company about £1,136 in employer NI.
Here's a detail that rarely makes the headlines. A salary below the lower earnings limit, currently £6,708, doesn't count as a qualifying year for your State Pension. A salary at or above that level does, at very little cost, because you're still well below the point where employee NI begins. If you're relying on your company salary for your National Insurance record, a salary of £5,000 may save employer NI but leave a gap in your record. It's a small point, but it's the kind of thing that matters a great deal in twenty years' time.
A dividend is a distribution of profit to shareholders. It can only be paid from profits the company has genuinely made after Corporation Tax, and only if the company can still pay its debts afterwards. Paying a dividend from money that isn't really there is an illegal dividend, and it can be recovered if the company later runs into trouble.
Since 6 April 2026, dividend tax is 10.75% in the basic rate band, 35.75% in the higher rate band, and 39.35% for additional rate taxpayers. The tax-free dividend allowance is £500. A year ago, the basic rate was 8.75%. That rise of two percentage points sounds modest, but it's close to a quarter increase in the rate itself, and it applies to every pound you take above your allowances.
Dividends carry no National Insurance at all, neither yours nor your company's. A pound taken as salary above the personal allowance faces 20% income tax plus 8% employee NI plus 15% employer NI. A pound taken as a dividend in the basic rate band faces 10.75%, after Corporation Tax has already taken its share. Even after the April increase, dividends remain the cheaper route for most directors in most years. The gap has simply narrowed.
Every dividend needs a board minute and a dividend voucher, even if you're the only director and the only shareholder. It feels a little silly writing minutes for a meeting of one. But that paperwork is what proves the payment was a dividend and not disguised salary, and I've seen HMRC challenge undocumented payments on exactly that basis. If you'd like the full picture on this, our guide on taking money out of a limited company covers the paperwork in detail.
Quick answer: For most single-director companies in 2026–27, the most tax-efficient approach is a modest salary, usually £12,570, with the rest taken as dividends. Paying yourself entirely through salary is almost always the most expensive option.
What this means for a company director: Your salary isn't really a "pay yourself" decision on its own. It's one half of a combined decision about salary, dividends, pension contributions and how much profit you leave in the company. A salary at the personal allowance gives you tax-free income and reduces your Corporation Tax bill, while dividends cover the rest at a lower rate than salary would attract. If your company has another employee and qualifies for the £10,500 Employment Allowance, the employer NI cost of a higher salary can disappear entirely, which strengthens the case further.
Example: Take a sole director whose company has £60,000 of profit available before any director pay, with no other income. With a £12,570 salary, the company pays £1,136 in employer NI and £8,796 in Corporation Tax, leaving about £37,500 for dividends. The director pays roughly £3,977 in dividend tax, and takes home about £46,091. With a £5,000 salary, there's no employer NI, but the company's Corporation Tax bill rises to £10,825, and the director takes home about £45,294. That's about £800 less, so the extra employer NI cost of the £12,570 salary is more than repaid. Pay everything as salary, and take-home drops to about £41,197.
Common mistakes: Setting a salary once and never revisiting it, even though thresholds and rates move; paying dividends without a board minute and voucher; taking dividends when the company doesn't have enough distributable profit; and assuming that what a friend or fellow contractor does is right for your circumstances, when their other income, company structure and profit level may be completely different.
When should you speak to an accountant? Before your tax year starts on 6 April, or at the very least before your company's year-end, when there's still room to adjust. A short conversation at the right moment is worth far more than a rescue operation afterwards.
Your other income changes the answer more than almost anything else. Dividends sit on top of your salary and other income when HMRC works out which band they fall into. A director with no other earnings and a £12,570 salary has £37,700 of basic rate band to use before dividend tax jumps from 10.75% to 35.75%. Someone with a part-time employment, rental income, or a second business has far less room. I worked with a contractor near Southborough who'd inherited a salary-and-dividend setup from his previous accountant, and it had never been adjusted for the rental income he'd started receiving two years earlier. His dividends were quietly landing in the higher rate band, and he'd been paying 35.75% on money that could have been taxed at 10.75% with a little timing and planning.
Corporation Tax is the other half of the equation. The small profits rate is 19% on profits up to £50,000, the main rate is 25% above £250,000, and profits in between attract marginal relief, producing an effective rate of up to 26.5% on each extra pound within that band. Because salary is deductible and dividends aren't, your salary decision changes the profit Corporation Tax is charged on. For a company sitting just above the £50,000 line, a well-timed salary or employer pension contribution can pull profit back into the lower band and save more than you'd expect. It's one of those areas where a few thousand pounds of planning can change the tax on tens of thousands.
National Insurance is why salary and dividends behave so differently. Salary above the personal allowance attracts employee NI at 8% up to £50,270, then 2% above, and employer NI at 15% above £5,000. Dividends attract neither. That's the entire reason the traditional "low salary, higher dividends" approach exists, and it's why a £12,570 salary is the sweet spot for most single directors: it fills your tax-free allowance without triggering any employee NI, and the employer NI it costs is more than offset by the Corporation Tax it saves and the dividend tax it avoids.
There's a fourth lever worth knowing about, even though it sits outside the strict salary-versus-dividends question. An employer pension contribution is deductible against Corporation Tax and attracts no income tax, dividend tax or National Insurance at all. Using the same £60,000 example, a £10,000 employer contribution reduces the director's cash take-home by about £7,200, not £10,000, because the Corporation Tax and dividend tax saved cover the rest. So £10,000 goes into the pension pot at a net cost of roughly £7,200. For a director who doesn't need every pound as immediate cash, it's often the most efficient use of company profit.
The Employment Allowance is worth up to £10,500 off your employer National Insurance bill. The rule that trips up many directors is that a company with a single employee who is also a director can't claim it. Once you employ somebody else on the payroll, the position can change dramatically. In that case, the £1,136 of employer NI on a £12,570 salary may be wiped out altogether, and a higher director salary, or additional pension contributions, can start to look more attractive. It's worth checking each year, because it's a rule that depends on your payroll rather than your profit.
Many of the owner-managed companies we look after around Tunbridge Wells and Sevenoaks have a spouse or partner as a second shareholder, and sharing dividends can make good use of two sets of allowances. But HMRC looks closely at arrangements where shares are handed over purely to save tax and the other person has no real involvement or control. The shares need to carry genuine rights, the dividends must actually be paid to the person who owns them, and the whole arrangement needs to stand up to a sensible reading. It can work very well. It also needs careful setting up.
If your total income climbs between £100,000 and £125,140, you lose £1 of personal allowance for every £2 of income above £100,000. That produces an effective marginal rate on salary of 60%, and dividends are hit hard too, at well over the headline 35.75%. For a director who is close to the lower end of that band, a pension contribution or a carefully timed dividend can pull income back below £100,000 and recover the allowance. It's one of the most valuable pieces of planning in the whole area.
Nothing says you have to take everything out. Profit left inside the company has already borne Corporation Tax, and you can take it later, perhaps in a year when your other income is lower or when you've retired. The one thing to avoid is treating the company bank account as your own. Money withdrawn that isn't salary or a properly declared dividend goes onto your director's loan account, and if it hasn't been repaid within nine months and one day of the year-end, the company faces a Section 455 charge of 35.75% on loans made on or after 6 April 2026. That tax can be reclaimed once the loan is cleared, but it ties up cash in the meantime, and I've seen it catch out businesses that simply lost track of what had been withdrawn.
I think it helps to see how these figures move, so here's the same comparison at three levels of company profit before any director pay, using 2026–27 rates for a sole director with no other income and no Employment Allowance.
At £40,000 of profit, a £12,570 salary leaves the director with about £31,633, a £5,000 salary with about £31,170, and a salary-only approach with about £29,033.
At £60,000, as shown above, the figures are about £46,091, £45,294 and £41,197.
At £100,000, they're about £65,210, £64,457 and £61,370. At this level, part of the dividend falls into the higher rate band, which is why the gap between the best and worst options narrows slightly.
Two things stand out. First, a £12,570 salary beats a £5,000 salary at every level shown, by between about £450 and £800. Second, the salary-only approach is consistently the most expensive, by somewhere between £2,600 and £4,900. That second gap is the one that surprises people most, and it's the reason I'm always a little wary of directors who tell me they pay themselves "just a salary, for simplicity."
The honest reason there's no permanent "best" split is that the inputs keep moving. A comparison I ran for the same £60,000 under 2024–25 rules, with employer NI at 13.8% above a £9,100 threshold and dividend tax at 8.75%, gave a take-home of about £47,234. Under 2026–27 rules, the same director takes home about £46,091. That's roughly £1,100 less, from a combination of higher employer NI and higher dividend tax, with the underlying business completely unchanged. A strategy set up two or three years ago and left alone is quietly costing more than it used to.
Beyond tax rules, you change. You take on an employee and become eligible for the Employment Allowance. Your partner starts or stops working. You buy a rental property. Your profit crosses £50,000 and marginal relief comes into play. You approach £100,000 and the 60% tax trap starts to bite. Each of these shifts the optimum, and none of them announces itself. That's why I'd always recommend reviewing your pay strategy at least once a year, ideally a couple of months before your company's year-end, when there's still time to act.
Dividends can be timed. A dividend declared just before 5 April uses up this year's bands, while one declared just after 6 April uses next year's. If your income varies, shifting a dividend from one side of that line to the other can keep it in the 10.75% band rather than the 35.75% one. It's a surprisingly effective piece of planning, and it costs nothing to do, provided the company has the profits to support it and the paperwork is in order.
I think of it as a bit like servicing a car. You wouldn't set the tyre pressures once and never check them again, however well you'd set them at the time. The same goes for your pay strategy. The right answer in 2024 isn't automatically right in 2026, and the right answer in 2026 may not be right in 2028.
Getting this decision right is one of the most valuable conversations we have with company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the wider South East, and it's one we're glad to have properly, using your actual figures rather than a generic example. If you're not sure your current salary and dividend split still makes sense under 2026–27 rates, or you've never had it reviewed at all, we'd genuinely like to help.
Getting in touch is simple. You can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk.
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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