Director Income PlannerSalary, Pension & Dividends Guide 2026/27

Why Income Planning Matters for Limited Company Directors

As a UK limited company director, how you pay yourself directly affects your take-home pay, your long-term wealth and your company's tax bill. The right mix of salary, dividends and pension contributions can mean the difference of thousands of pounds a year.

The 10.75% basic-rate dividend tax and 15% employer National Insurance applying from £5,000 make 2026/27 a year where small planning decisions matter more than ever.

Who This Guide Is For

You will get the most value if you draw a mix of salary and dividends, and want to understand how employer pension contributions, the £100,000 Personal Allowance taper, and the new 2026/27 tax rates change the optimal split.

UK Tax Rates and Thresholds 2026/27

Key Thresholds 2026/27

Salary Tax and NI: What Your Company Actually Pays

Below shows the true cost to your company at common salary levels under 2026/27 rates. With Employer NI now at 15% on earnings above £5,000, even a "minimum" director salary triggers a meaningful Employer NI bill.

* Total Cost to Company = salary + Employer NI, before Corporation Tax relief. Employer NI on a £12,570 salary is (£12,570 − £5,000) × 15% = £1,136.

Dividend Tax Rates 2026/27

Dividends are paid from company profits after Corporation Tax. They attract no National Insurance, but are taxed at your personal dividend rate based on total income.

Side-by-Side Comparison: Salary, Dividends, Pension

Your Profit Extraction Options

1. Salary (PAYE)

Salary is regular employment income subject to Income Tax and Class 1 National Insurance. As a director, you set your own level. The main reason to take any salary at all is to maintain your State Pension record and to provide provable income for mortgage applications.

What is the most tax-efficient director salary for 2026/27?

For 2026/27, the typical optimal salary is £12,570 — the full Personal Allowance. Any earnings between the Lower Earnings Limit (£6,708) and the Primary Threshold (£12,570) qualify you for a State Pension year without you personally paying NI. The trade-off: above the Secondary Threshold (£5,000), the company pays 15% Employer NI on every additional pound. On a £12,570 salary that is £1,136 in Employer NI — much higher than under 2025/26 rules because the Secondary Threshold dropped from £9,100 to £5,000 and the rate rose from 13.8% to 15%.

Single-director companies and the Employment Allowance

The Employment Allowance (£10,500 per year) lets eligible employers offset Employer NI. However, single-director companies with no other employees paid above the Secondary Threshold are not eligible. If you are the sole director and only employee, you cannot claim the allowance and the full Employer NI bill applies.

2. Dividends

Dividends are distributions of post-Corporation-Tax profit to shareholders. They attract no NI, but the company has already paid 19%–25%Corporation Tax on the underlying profit before you receive a penny.

How dividends are taxed in 2026/27

The first £500 of dividends are tax-free. After that, dividend rates are 10.75% in the basic band, 35.75% in the higher band, and 39.35% above £125,140. The basic and higher rates each rose by 2 percentage points from 2025/26.

When dividends make sense

• You need accessible cash now, not locked away until pension age
• You have already maximised employer pension contributions for the year
• You are a basic-rate dividend payer — even at 10.75% the combined CT + dividend tax stays manageable

3. Employer Pension Contributions — Your Most Tax-Efficient Option

Employer pension contributions are paid directly by the company into your pension. They are a deductible business expense, so they reduce taxable profit and Corporation Tax. Critically, they do not count as personal income, so they avoid Income Tax, Employee NI and Employer NI entirely.

How pension contributions save tax — a 2026/27 worked example

The annual allowance: how much can you contribute?

The standard pension Annual Allowance is £60,000 per tax year across all schemes. This includes both employer and personal contributions. If you have already flexibly accessed a pension, the Money Purchase Annual Allowance (MPAA) drops your limit to £10,000. Above-allowance contributions are taxed as income at your marginal rate.

Carry-forward: contributing more than £60,000 in one year

Unused Annual Allowance from the previous three tax years can be carried forward, provided you were a member of a registered pension scheme in those years. In a strong profit year this lets a single-director company contribute well above £60,000 — useful when bonuses or one-off contracts create a temporary spike.

The £100,000 Personal Allowance Trap

Once your adjusted net income exceeds £100,000, your Personal Allowance tapers away by £1 for every £2 of income above the threshold. By the time income reaches £125,140, the Personal Allowance is fully withdrawn.

The taper creates an effective marginal rate of 60% on income between £100,000 and £125,140: 40% on the income itself, plus 40% on the slice of Personal Allowance you lose.

How employer pension contributions help directors above £100,000

Employer pension contributions reduce company profit but do not count as personal income. That means they do not feed into the adjusted net income figure that triggers the taper.

A director approaching £100,000 can use employer contributions to keep personal income below the threshold while still extracting profit from the company. You build pension wealth, save Corporation Tax, and stay clear of the 60% taper zone — all in one move.

Three Optimisation Strategies

Strategy 1: Maximise Wealth

Take exactly enough salary and dividends to hit your net income target, then channel every remaining pound of distributable profit into the pension (up to the Annual Allowance, plus any carry-forward). This minimises lifetime tax and produces the highest total wealth outcome — but ties up cash until pension age.

Strategy 2: Maximum Liquidity

Take exactly your target net income via salary plus dividends. Make zero employer pension contributions. Leave all surplus profit in the company as accessible reserves. Highest flexibility, highest tax cost.

Strategy 3: Maximise Pension

Aggressively prioritise pension within the Annual Allowance + carry-forward. The dividend target is sized so that personal income stays at or below £100,000 where possible, and any remaining surplus continues into the pension. Best when you are behind on retirement saving and can defer immediate cash.

Planning Company Reserves

Before extracting every pound, hold back enough to cover business costs and tax liabilities. A common rule of thumb is 3–6 months of operating expenses plus a separate provision for upcoming Corporation Tax and VAT bills. Reserves give you flexibility in slow months without forcing you to draw additional taxable income at the wrong time.

Timing Your Income Across the Tax Year

The 2026/27 UK tax year runs 6 April 2026 – 5 April 2027. The Personal Allowance, dividend allowance and pension Annual Allowance reset on 6 April. Income taken in one year cannot be moved into another, so end-of-year reviews matter — especially for directors near the £50,270 higher-rate threshold or the £100,000 taper.

Common Mistakes to Avoid

• Taking all profit as dividends when employer pension contributions would dramatically cut total tax.
• Drifting past £100,000 without realising the 60% effective taper applies.
• Assuming Employment Allowance applies — most single-director companies are ineligible.
• Triggering MPAA by flexibly accessing a pension while still wanting to contribute large amounts later.
• Forgetting carry-forward in a bumper profit year, leaving Annual Allowance unused.
• Setting salary on autopilot using last year's optimal level — 2026/27 Employer NI rules changed materially.

Model Your Scenario with the Director Income Planner