Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
This article was written with the help of AI.
From 6 April 2026, dividends above the £500 dividend allowance are taxed at 10.75% in the basic rate band and 35.75% in the higher rate band [2]. Salary, by contrast, passes through PAYE, where employer National Insurance of 15% applies above £5,000 a year [8]. The way an owner-director combines the two decides how much of the company's profit reaches the director's bank account.
A limited company is a separate legal person, so its money is not the director's money. Every pound has to leave the company through a recognised channel: salary, dividends, employer pension contributions, expense reimbursements or a director's loan [1]. Each channel carries its own tax treatment, paperwork and timing, and mistakes are expensive, from unlawful dividends to unexpected Corporation Tax charges on overdrawn loan accounts.
This guide sets out each route, the 2026-27 figures behind it, a worked comparison of a salary-only and a salary-plus-dividends approach for the same company profit, and the payroll steps a director must complete before the first payment.
Key takeaways
- A director's salary is deductible for Corporation Tax and runs through PAYE; dividends are paid from post-tax profit and are not a business cost.
- For the 2026-27 tax year, dividend tax rates are 10.75%, 35.75% and 39.35%, with a £500 dividend allowance [2].
- Directors' National Insurance is assessed on an annual earnings period, not pay period by pay period.
- A company whose only employee is its single director cannot claim the £10,500 Employment Allowance.
- Dividends can only be paid from profits available for distribution, and each one needs board minutes and a voucher.
The five ways money leaves a limited company
GOV.UK lists the ways a director can take money out: salary, expenses and benefits, dividends, and director's loans, with salary and benefits requiring the company to register as an employer [1]. Employer pension contributions form a fifth route, treated as an allowable business expense when they are not excessive for the work done [11].
The table below compares the five routes [1].
| Route | Deductible for Corporation Tax | Personal tax | National Insurance | Paperwork |
|---|---|---|---|---|
| Salary | Yes | Income tax via PAYE | Employee and employer Class 1 | FPS on or before payday |
| Dividends | No | Dividend tax via Self Assessment | None | Board minutes and voucher |
| Employer pension contribution | Yes, if not excessive | None on payment | None | Scheme records |
| Expense reimbursement | Yes, for business costs | None if wholly business | None | Receipts |
| Director's loan | No | Possible benefit in kind | Possible Class 1 | Loan account records |
Directors keep a separate duty to follow the articles of association, keep company records and file accounts and the Company Tax Return [12], so each route must be properly recorded in the company's books.
Paying a director's salary through PAYE
A director is an office holder and an employee for National Insurance purposes [7]. A company must register as an employer even where it only employs its own sole director, and registration must happen before the first payday [24]. From then on, the company runs PAYE [28] and sends a Full Payment Submission on or before each payday [27].
The 2026-27 thresholds that shape a director's salary
Four annual figures drive almost every salary decision. They are set out below for the 2026-27 tax year [8].
| Threshold | Annual figure | Effect |
|---|---|---|
| Secondary Threshold | £5,000 | Employer NI at 15% starts above this |
| Lower Earnings Limit | £6,708 | Earnings above this protect the National Insurance record |
| Primary Threshold | £12,570 | Employee NI at 8% starts above this |
| Personal Allowance | £12,570 | Income tax at 20% starts above this |
The Lower Earnings Limit matters for the State Pension. A person needs 10 qualifying years to receive any new State Pension and usually 35 for the full rate [20]. Employees earning between the Lower Earnings Limit and the Primary Threshold pay no NI, but their contributions are treated as paid [22], so a salary at or above £6,708 secures a qualifying year at no personal NI cost.
Annual earnings periods for directors
Directors pay NI on their annual earnings, not on each pay period [17]. Under the standard method (code AN), payroll works out NI on cumulative pay for the tax year at each payment and deducts what has already been paid; under the alternative method (code AL), NI is worked out period by period and reconciled at the last payment of the year [17]. The FPS carries the method in the director's NIC calculation field.
HMRC's director guidance explains that a director appointed part-way through the year has a pro rata annual earnings period, based on the tax week of appointment and the remaining weeks [18]. HMRC's manual shows how a bonus paid mid-year changes the final month's NI under the alternative method [19]. The full mechanics are covered in the guide to company director payroll.
What different salary levels cost
The figures below come from the Moonworkers calculator engine for an annual salary on tax code 1257L and NI category A, with the annual earnings period applied [8].
| Annual salary | Income tax | Employee NI | Employer NI | Net pay |
|---|---|---|---|---|
| £5,000 | £0 | £0 | £0 | £5,000 |
| £6,708 | £0 | £0 | £256.20 | £6,708 |
| £12,570 | £0 | £0 | £1,135.50 | £12,570 |
| £50,270 | £7,538.20 | £3,016 | £6,790.50 | £39,715.80 |
At £12,570, the director pays no tax or NI, while the company pays £1,135.50 of employer NI. Because salary and employer NI are both deductible, they reduce Corporation Tax at 19% for a small-profits company [3], saving £2,604.05 on the £13,705.50 total cost. That saving exceeds the employer NI, which is why a salary at the Personal Allowance is a common starting point.
Employment Allowance and the single-director rule
Employment Allowance reduces employer NI by up to £10,500 for the 2026-27 tax year [8]. It is not available where the company has only one director and that director is the only employee paid above the Secondary Threshold [6]. Once a second earner joins the payroll above that threshold, the allowance can wipe out the director's employer NI as well. More on the eligibility rules sits in the guide to Employment Allowance for limited companies.
Where Employment Allowance applies, the employer NI argument against a higher salary weakens, and some companies choose a salary closer to the higher rate threshold. The right level depends on the company's profit, the number of employees and the director's other income [6].
Paying dividends lawfully
Dividends are a distribution of profit to shareholders, not a payment for work. The company does not pay tax on them and cannot treat them as a business cost [1]. The shareholder pays income tax on dividends above the £500 allowance, at rates that depend on which income tax band the dividends fall into [2].
Dividend tax rates for the 2026-27 tax year
The Budget measure raised the ordinary and upper dividend rates by 2 percentage points from 6 April 2026, while the additional rate stayed unchanged [9]. The table compares the rates [2].
| Band | Before 6 April 2026 | From 6 April 2026 |
|---|---|---|
| Basic rate | 8.75% | 10.75% |
| Higher rate | 33.75% | 35.75% |
| Additional rate | 39.35% | 39.35% |
Dividends are stacked on top of salary. Any part of the dividend that falls within the unused Personal Allowance is not taxed, and the £500 allowance covers the first slice above it [2]. Directors receiving dividends usually file Self Assessment, since untaxed dividend income is one of the reasons HMRC lists for needing a return [25].
Distributable profits, minutes and vouchers
Section 830 of the Companies Act 2006 allows a company to make a distribution only out of profits available for the purpose, meaning accumulated realised profits less accumulated realised losses [13]. A dividend paid without sufficient reserves is unlawful, however much cash sits in the bank. GOV.UK adds that a dividend must be declared at a directors' meeting with minutes kept, even where there is only one director, and that each payment needs a dividend voucher [1].
Dividends must usually be paid to all shareholders in proportion to their shares [1]. Profits available for dividends are measured after Corporation Tax, which is charged at 19% on profits up to £50,000 and 25% above £250,000, with Marginal Relief in between [4]. Corporation Tax is normally due 9 months and 1 day after the end of the accounting period [26], so reserves should be set aside before dividends are declared.
A worked comparison: salary only versus salary plus dividends
Consider a one-director company with £60,000 of profit before paying the director, no other employees, and therefore no Employment Allowance [6]. The director has no other income and lives in England.
Route A: all salary
If the whole £60,000 is paid as salary, employer NI has to come out of the same pot. A gross salary of £52,826 plus employer NI uses up the profit, and leaves no taxable profit for Corporation Tax [3]. The engine gives the following figures for that salary under the 2026-27 rules [8].
| Line | Amount |
|---|---|
| Gross salary | £52,826 |
| Employer NI | £7,173.90 |
| Income tax | £8,558.80 |
| Employee NI | £3,067.12 |
| Net pay to the director | £41,200.08 |
Route B: £12,570 salary plus dividends
Under Route B, the company pays a £12,570 salary, with £1,135.50 of employer NI, and pays Corporation Tax on what is left [3]. The post-tax profit is then distributed as a dividend, taxed at the 2026-27 basic dividend rate after the £500 allowance [2].
| Line | Amount |
|---|---|
| Salary (no tax or employee NI) | £12,570 |
| Employer NI | £1,135.50 |
| Taxable company profit | £46,294.50 |
| Corporation Tax at 19% | £8,795.95 |
| Dividend paid | £37,498 |
| Dividend tax at 10.75% after the £500 allowance | £3,977.28 |
| Total received by the director after tax | £46,090.72 |
Route B leaves the director £4,890.64 better off on the same profit. The gap has narrowed compared with years when the basic dividend rate was 8.75% [9], and it shrinks further once dividends cross into the higher rate band, where the 35.75% rate applies [2].
What the comparison leaves out
The comparison deliberately ignores pension contributions, student loan deductions and the director's other income. A director repaying a student loan sees deductions on salary above the plan threshold through PAYE [8], while dividends feed into Self Assessment instead [25]. Lenders, maternity entitlement and some benefits also look at salary rather than dividends, so the cheapest mix is not always the most useful one. The detailed trade-offs are developed in the guide to director salary and dividends.
Employer pension contributions
An employer contribution to a registered pension scheme for a director is normally an allowable expense, unless the overall package is excessive for the work done [11]. HMRC's manual says that where a director's remuneration is comparable with unconnected employees doing similar work, the contribution should be accepted as wholly and exclusively for the trade [11]. No income tax or NI arises on the contribution itself.
The annual allowance
Contributions count towards the annual allowance, which is £60,000 for the tax year, with unused allowance from the previous 3 tax years available to carry forward [10]. The allowance tapers for those with threshold income above £200,000 and adjusted income above £260,000, and a lower money purchase annual allowance applies once a pension has been flexibly accessed [10]. For a director who does not need all the profit as income now, a pension contribution saves Corporation Tax without any dividend tax. The design choices are covered in the guide to director pension contributions.
Automatic enrolment for other staff
Where the company employs staff besides the director, automatic enrolment duties start with the first member of staff, covering workers aged 22 to State Pension age who earn at least £10,000 a year and normally work in the UK [23]. The pension contributions the company pays for those staff are a separate cost line to budget for alongside the director's own pay [11].
Expenses, benefits and director's loans
Business expenses reimbursed to a director are not income, but benefits provided to a director can be taxable. HMRC's A to Z of expenses and benefits covers items such as company cars, mobile phones, meals, travel and income tax paid on a director's behalf [14]. Benefits that are taxable attract Class 1A NI at 15% for the employer [8].
Borrowing from the company
A director's loan is any money taken out that is not salary, a dividend, an expense repayment or money previously paid in [1]. The company must keep a director's loan account and show its year-end balance on the balance sheet [5]. If a director owes more than £10,000 at any time in the year, the loan must be treated as a benefit in kind and Class 1 NI deducted [15].
A loan not repaid within 9 months of the end of the accounting period triggers a Corporation Tax charge under section 455, which the company can reclaim once the loan is repaid, written off or released [15]. The section 455 rate is aligned to the dividend upper rate, so the increase in that rate from 6 April 2026 also raises the charge on new loans [9]. A written-off loan is taxed as income on the director and attracts Class 1 NI through payroll [15]. The full rules are in the guide to the director's loan account.
Lending to the company
The reverse flow is simpler. The company pays no Corporation Tax on money a director lends it, and interest the company pays on that loan is a business expense for the company and income for the director [16]. The company deducts income tax at the basic rate of 20% from the interest and reports it quarterly on form CT61 [16].
Setting up the payroll before the first payment
Running a one-person payroll is still payroll. The company registers as an employer before the first payday [24], operates PAYE [28], files an FPS on or before each payday [27], and marks the director's NIC calculation method on the FPS [17]. A payslip is still needed for each payment, which an instant payslip generator can produce for a company that pays its director only occasionally.
Directors of growing businesses usually move from a spreadsheet to software once a second employee joins and Employment Allowance becomes available [6]. Small business payroll built on an HMRC-recognised engine applies the annual earnings period automatically, so the director's NI reconciles at the year end without manual adjustments [17].
Check the salary figures with the calculator
Before fixing a director's salary for the year, the cost of each option can be sized with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross salary.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category. If in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Paying oneself from a limited company is less a single decision than a sequence: register the payroll, set a salary that protects the National Insurance record and uses the Personal Allowance, distribute post-tax profit as dividends only when reserves allow, and use pension contributions for profit that is not needed as income. Each step is governed by a different set of rules, from PAYE and the director's annual earnings period to company law on distributable profits.
The higher dividend rates in force from 6 April 2026 narrow, but do not close, the gap between dividends and salary for basic rate taxpayers. As thresholds stay frozen and rates move, the mix that works best will keep shifting, which is why directors who model their pay each tax year, rather than repeating last year's pattern, keep more of their company's profit.
Frequently asked questions
What is the most tax-efficient director salary for the 2026-27 tax year?
For a company with no Employment Allowance, a salary of £12,570 is a common choice: the director pays no income tax or employee NI, and the Corporation Tax saved on the salary and its employer NI exceeds that NI [8]. Where Employment Allowance is available, a higher salary can make sense [6]. The answer depends on profits, other employees and other income.
Do directors pay National Insurance on dividends?
No. Dividends are not earnings for National Insurance, so neither the director nor the company pays NI on them [1]. The director pays dividend tax instead on dividends above the £500 allowance [2].
Can a sole director pay dividends without a board meeting?
No. GOV.UK requires a directors' meeting to declare the dividend, with minutes kept, even when the company has only one director [1]. The company must also have enough profits available for distribution under section 830 of the Companies Act 2006 [13].
Does a company with only one director need to run payroll?
Yes, if it pays the director a salary. A company must register as an employer even when the only person it employs is its sole director, and it must do so before the first payday [24]. It then reports each payment to HMRC through an FPS [27].
