Why the salary/dividend split matters
Most limited company directors choose to take a combination of a small salary (typically set at or around the National Insurance threshold) and dividends from the company's profits. This approach has historically been more tax-efficient than taking a larger salary, because dividends are not subject to National Insurance and are taxed at lower rates than income.
However, the gap between salary and dividend taxation has narrowed in recent years. Dividend tax rates for 2026/27 are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). It is more important than ever to make sure your split is reviewed regularly, rather than left unchanged year after year.
The salary threshold question
Many directors set their salary at the Lower Earnings Limit (£6,500 for 2026/27), which preserves their National Insurance contribution record without triggering an actual NIC liability. Others set their salary at the Primary Threshold (£12,570), meaning the company pays a small Employer's NIC but the director keeps their record and benefits from the corporation tax deduction on the salary.
The right answer depends on your personal circumstances, your company's profit levels, and whether there are other employees or directors involved. There is no universal solution — which is why individual advice matters.
