Most founders decide how to pay themselves once, in the first year, on the advice of whoever set the company up, and then never revisit it. That was defensible when the numbers held still. They have not held still. The thresholds that determine the answer have moved twice in fifteen months, and the arrangement that was optimal in 2024 is now costing a meaningful sum every year to a founder who has not looked at it.
Here is the uncomfortable truth that most guides to director pay soft-pedal: there is no correct answer, and any article that gives you one number without asking about your company has skipped the part that determines it. The optimal split turns on your corporation tax rate, whether your company can claim the Employment Allowance, how much you need to withdraw, and whether you have other income. Change any one and the answer changes.
This piece sets out the numbers that actually drive the decision in 2026/27, the two structural questions that determine your answer, the traps that catch founders at specific income levels, and what to model.
Why this changed
Two sets of changes matter, and they push in opposite directions.
In April 2025, the employer National Insurance secondary threshold fell from £9,100 to £5,000, and the employer rate rose to 15 per cent [1]. Salary became more expensive for companies overnight, which argued for taking less as salary.
Then from 6 April 2026, following the Autumn Budget 2025, dividend tax rose by two percentage points at both the basic and higher rates: from 8.75 to 10.75 per cent, and from 33.75 to 35.75 per cent [2]. Dividends became more expensive too, which argues for taking more as salary.
The net effect is that the traditional answer, a very low salary with everything else as dividends, is no longer automatically right. Salary is deductible against corporation tax, and with the main rate at 25 per cent and a marginal rate of 26.5 per cent in the tapering band, that deduction is worth considerably more than it was when corporation tax was 19 per cent for everyone [3].
The numbers for 2026/27
Personal allowance: £12,570, frozen until at least April 2028 [2].
Dividend allowance: £500, also frozen [2].
Dividend tax rates: 10.75 per cent at the basic rate and 35.75 per cent at the higher rate, both up two percentage points from 6 April 2026 [2].
Employee National Insurance: 8 per cent on salary between £12,570 and £50,270, then 2 per cent above [4].
Employer National Insurance: 15 per cent on salary above the secondary threshold of £5,000 [1].
Employment Allowance: up to £10,500 of employer National Insurance can be offset by eligible employers. It is not available where the sole employee is also a director [3].
Lower Earnings Limit: £6,500, which is the level at which a year counts as qualifying for the State Pension [5].
Corporation tax: 19 per cent small profits rate, 25 per cent main rate, and an effective marginal rate of 26.5 per cent within the tapering band [3].
The two questions that determine your answer
Everything else is detail. These two are structural.
Can your company claim the Employment Allowance?
This is the single largest fork in the decision. A company whose only employee is also its sole director cannot claim it. A company with a second employee who is not a director generally can.
If you can claim it, the allowance absorbs the employer National Insurance on a salary at the personal allowance level, and taking £12,570 as salary is commonly optimal because the corporation tax deduction comes through without an offsetting National Insurance cost.
If you cannot claim it, every pound of salary above £5,000 costs the company 15 per cent before it reaches you. Whether that is still worth paying depends entirely on your corporation tax rate, which is the second question.
What corporation tax rate does your company pay?
At 19 per cent, the deduction is worth less and the employer National Insurance bites harder. At 25 per cent, or at the 26.5 per cent marginal rate in the taper, the deduction is worth substantially more and salary above the secondary threshold can be net positive even after National Insurance.
This is why a single recommended figure is unhelpful. Two founders with identical drawings and different answers to these two questions have genuinely different optimal structures.
The traps that catch people
The £100,000 cliff edge. Between £100,000 and £125,140 of personal income, the personal allowance is withdrawn at £1 for every £2 of income, producing an effective marginal rate of around 60 per cent [6]. Founders stack dividends without modelling the effect and pay far more than they expect on the marginal band. This is the single most expensive unforced error in owner-manager pay, and the usual answer is an employer pension contribution rather than a further dividend.
Assuming dividends are always cheaper. Combine corporation tax with the new dividend rates and a higher-rate director pays roughly half of a pound of company profit in total tax when it is extracted as a dividend [6]. Salary carries National Insurance but is deductible. The gap has narrowed considerably.
Declaring dividends without distributable reserves. A dividend is only lawful if the company has sufficient distributable profits and the paperwork is correct. An unlawful dividend is not a dividend, and it typically reverts to a director’s loan, which brings its own charge at 35.75 per cent.
Taking drawings and formalising later. Money withdrawn without a declared dividend or payroll entry builds an overdrawn director’s loan account. It is the most common way founders create a five-figure tax problem without making a decision.
Ignoring the pension route. Employer pension contributions avoid employee National Insurance, employer National Insurance and dividend tax simultaneously, and are deductible for the company [6]. For founders above the higher rate threshold who do not need the cash immediately, this is frequently the most efficient extraction available.
Setting salary below the Lower Earnings Limit. A salary under £6,500 may not secure a qualifying year for the State Pension. Saving a small amount of National Insurance while losing a qualifying year is a poor trade over a working life.
Forgetting there are two of you. Where a spouse or partner is genuinely a director or shareholder, both sets of allowances and both basic rate bands are available. The combined saving from each adopting an appropriate structure is materially larger than either alone.
What to model before you decide
- Establish your Employment Allowance position. Sole director with no other employees, or not. This determines which branch of the decision you are on before any arithmetic.
- Establish your corporation tax rate. Small profits, main rate, or in the taper. The value of the salary deduction depends on it.
- Work out what you actually need to withdraw. Extraction beyond your genuine requirement is the most expensive money in the business. What you leave in is taxed at 19 to 26.5 per cent. What you take out as a higher-rate dividend is taxed at roughly double that in combination.
- Model three scenarios rather than picking one. Salary at the secondary threshold, salary at the personal allowance, and salary into the basic rate band. Run each through corporation tax, employer National Insurance, employee National Insurance and dividend tax to a net figure in your pocket.
- Check the £100,000 line. If your total personal income approaches it, model the taper explicitly before declaring a further dividend.
- Consider employer pension contributions for anything above your spending requirement. They sidestep three taxes at once.
- Get it checked annually, not once. The thresholds have moved twice in fifteen months, and both allowances are frozen while wages rise, which pulls more founders into higher bands every year without anyone changing anything.
The wider point about founder pay
Tax efficiency is the narrow question, and it is not the only one. Two further considerations matter and rarely appear in guides written by accountants.
If you intend to raise funding, your salary is visible, and it is read. A founder paying themselves very little signals commitment to some investors and a lack of realism to others, particularly where the plan then shows a large salary increase immediately post-investment. Lenders assess it differently again: they want to see that your drawings are affordable and that the business is not being stripped of the cash needed to service repayments.
If you intend to sell, sustained under-payment distorts the profit figure. A buyer will normalise your salary to a market rate for the role, which reduces the earnings the valuation is built on. Founders who pay themselves £9,000 for a job worth £80,000 sometimes discover that the profit they have been proud of largely belongs to a director’s salary they never took.
And if you are the only person in the business who cannot be replaced at the salary shown in the accounts, that is worth knowing before someone else works it out.
The principle underneath all of this
Founder pay is one of the few decisions in a small company that is purely arithmetic and is almost never treated that way. It gets set once, informally, at a point when the business looked different, and the thresholds were different, and it then persists for years because nobody owns the question.
The right structure is not a number somebody else can give you. It is the output of four inputs you already have, and it takes an afternoon with an accountant to establish and twenty minutes a year to confirm.
Getting the financial visibility right across the whole business, not just your own pay? SGI has advised more than 2,000 businesses across 47 industries since 2014, and financial clarity is where most growth constraints turn out to be hiding. Book a conversation or read about Business Consulting.
SGI is not a tax adviser and does not provide tax advice. Rates and thresholds change at fiscal events and individual circumstances differ. Confirm your position with a qualified accountant before acting.
Frequently Asked Questions
What is the most tax-efficient director’s salary for 2026/27?
It depends primarily on whether your company can claim the Employment Allowance and what corporation tax rate it pays. Companies that can claim it commonly find a salary at the £12,570 personal allowance works well. Sole-director companies that cannot claim it face 15 per cent employer National Insurance above £5,000, and whether a higher salary still pays depends on the corporation tax deduction.
Did dividend tax go up?
Yes. From 6 April 2026 the basic rate rose from 8.75 to 10.75 per cent and the higher rate from 33.75 to 35.75 per cent, following the Autumn Budget 2025. The dividend allowance stayed at £500 and the personal allowance at £12,570, both frozen until at least April 2028.
Are dividends still better than salary?
Less clearly than before. Dividends carry no National Insurance, which remains a real advantage, but they are paid from post-corporation-tax profit and are now taxed at higher rates. Salary is deductible against corporation tax at up to 26.5 per cent in the marginal band. The gap has narrowed enough that it needs modelling rather than assuming.
What happens if I just take money out as I need it?
You create an overdrawn director’s loan account. If it is not repaid within nine months and one day of your year end, the company pays a section 455 charge at 35.75 per cent on loans advanced from April 2026, refundable but slowly.
Should I pay my spouse or partner?
Where they are genuinely a director, employee or shareholder and the payment reflects real involvement, using both sets of allowances and basic rate bands is legitimate and can be substantially more efficient than one person extracting everything. It must reflect reality, not a paper arrangement.
How does my salary affect a funding application?
Lenders check affordability, so they want to see that drawings leave enough to service repayments. Equity investors read your salary as a signal about realism and commitment, in both directions. A very low salary that jumps sharply after investment invites questions.
References
- British Business Bank, Small Business Finance Markets Report 2025/26, March 2026. https://www.british-business-bank.co.uk/about/research-and-publications/small-business-finance-markets-report-2026
- Daniel Wolfson, Salary vs dividends: best pay mix for directors and shareholders 2026-27, May 2026. https://danielwolfson.co.uk/dividends-vs-salary-directors-pay-mix/
- Taxsure, Optimal director salary 2026/27, April 2026. https://www.taxsure.co.uk/resources/blog/optimal-director-salary-2026-27/
- 1st Formations, Most tax-efficient director’s salary and dividends for 2026-27, July 2026. https://www.1stformations.co.uk/blog/tax-efficient-directors-salary-and-dividends/
- Athos Business Solutions, How much should a company director pay themselves in 2026?, February 2026. https://www.athos.uk.com/how-much-should-a-company-director-pay-themselves-in-2026-salary-vs-dividends/
- AKM Advisory, Salary vs dividends vs pension 2026/27, May 2026. https://akm-advisory.com/salary-vs-dividends-vs-pension-2026-27/
- HM Revenue and Customs, Tax on dividends, GOV.UK. https://www.gov.uk/tax-on-dividends
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Kurt Graver is the founder and CEO of SGI Consultants, a business consultancy that has helped over 2,000 entrepreneurs establish successful startups using systematic business development methodologies. An accountant with an MBA and 25 years of commerce and consultancy experience, Kurt specialises in strategic planning, market analysis, and sustainable business growth