For many owner-managed limited companies the question is not whether to take a mix of salary and dividends, but how much of each.

The short answer? A relatively small salary, with the balance taken as dividends, remains a tax-efficient option for many directors of profitable limited companies in 2027/28.

Although dividend tax rates increased in April 2026, the main tax allowances and dividend rates remain unchanged for 2027/28. However, getting the balance right means looking beyond personal tax. Employer National Insurance, Corporation Tax, other income and your company’s available profits can all affect the best approach.

Let’s look at the figures we recommend for 2027/28 and what you need to consider before deciding how to pay yourself.

Salary vs Dividends

Before we get into the numbers, it’s worth being clear about what these terms actually mean:

Salary – paid through PAYE, counts as employment income, subject to Income Tax and National Insurance. It is an allowable business expense, reducing Corporation Tax.

Dividends – payments made to shareholders from post-tax profits. They are not an allowable business expense for Corporation Tax. Instead, they are taxed separately at dividend rates once received by you personally.

Why this distinction matters

We often hear directors talk about “paying themselves dividends as salary”. In HMRC’s eyes, that is a dangerous mix-up. If you record dividends as if they were salary, you may be liable for Employers’ and Employees’ NI, plus PAYE tax you weren’t expecting.

When dividends are not an option

Unlike salary, you cannot pay dividends unless your company has sufficient post-tax distributable profits. That means:

  • A new company running at a loss cannot issue dividends until it generates profits
  • An insolvent company cannot legally declare dividends

If you take money out as dividends when profits aren’t there, HMRC can reclassify it as a director’s loan or unlawful distribution, bringing extra tax charges and potentially personal liability.

Why the salary plus dividends approach is still worth it

Dividend tax rates increased from April 2026 and remain at their higher levels for 2027/28. This meant some directors were asking whether the traditional small-salary-plus-dividends structure still holds up. It does. The gap has narrowed slightly this year, but salary plus dividends still comfortably outperforms salary alone for most profitable owner-managed companies.

The 2027/28 director’s salary sweet spot

From 6 April 2027:

  • Earnings above £5,000 per year (£416 per month) trigger 15% Employers’ National Insurance for the company
  • You need to earn at least £6,916 per year to get a qualifying year for your State Pension

So why do we recommend a salary higher than that, even though it means paying more NI?

Because:

  • Salary and Employers’ NI are both deductible for Corporation Tax purposes
  • At our suggested £12,564 per year (£1,047 per month) salary, the Corporation Tax saving remains substantial
  • There is no personal tax payable on this salary level if your total taxable income is under £100,000 and you have no other employment income

The recommended mix for 2027/28

To maximise efficiency, we suggest drawing income up to the top of the Basic Rate tax band:

MonthlyAnnual
Salary1,047.0012,564.00
Dividends3,142.17 37,706.00
Tax333.253,999.00
Net3,855.9246,271.00

This assumes no other income (interest, rental income, etc.) is using up your Basic Rate band and that your company has enough post-tax profits to pay dividends at this level.

Dividends above this will be taxed at 35.75% until your total taxable income hits £100,000, reflecting the increase in dividend tax rates that took effect from April 2026.

The National Insurance timing trap for directors

One quirk for directors is that NI is calculated on a cumulative basis for the tax year.

If your company has no other employees, the Employers’ NI will first become payable partway through the year. This is because the first £5,000 of earnings is NI-free and gets used up over the first few months.

This means:

  • If you are used to no NI bills until the year-end, expect them to start mid-year
  • Even small administrative changes, such as having to pay HMRC monthly, can trip up smaller companies who have not had to before

A note for R&D claimants

If your company claims R&D relief and you are actively involved in eligible projects:

  • Salary and pension contributions count as qualifying R&D costs
  • Dividends do not

If you are claiming R&D every year, we would consider a mix of salary and dividends that works in the long-term. One-off R&D projects need careful planning too.

You cannot switch directors back and forth between salary-heavy years and dividend-heavy years without a longer-term plan. We build our recommendations around your intentions so you maximise both tax efficiency and claim value.

Don’t forget how dividends are shared

Dividends have to be paid in line with shareholdings. So, if you and a spouse each own 50% of the company, you’ll each receive 50% of any dividend declared.

That can create issues if one of you has other income, such as employment, which pushes them into a higher tax band. In those cases, the same dividend can end up costing one shareholder more tax than the other.

This is where advance planning matters, different share structures and planning options exist, but these go beyond the basics of this article. Get in touch with us for advanced planning on this.

Need to make sure your director pay mix is right for 2027/28?

Our Client Managers can help you calculate an appropriate salary and dividend structure, taking account of your wider financial picture, from Corporation Tax and R&D claims to pension planning and cash flow.

The aim is simple: make informed decisions about how you take money out of your business, keep your tax affairs in order and avoid unwelcome surprises from HMRC.

Speak to your A4G Client Manager to review your director remuneration for 2027/28.

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