UK Director Profit Extraction (2026/27)
Director profit extraction 2026/27: salary vs dividends at 10.75%/35.75%/39.35%, employer pension, Employment Allowance and BADR at exit.
Extraction methods by tax cost
| Method | Tax rate | Notes |
|---|---|---|
| Salary up to the Secondary Threshold (£5,000) | No employer NI; no employee NI; no Income Tax within the Personal Allowance | Deductible for Corporation Tax. Below the Lower Earnings Limit (£6,708), so it does not earn a National Insurance qualifying year. |
| Salary £5,000 - £12,570 | 15% employer NI; no employee NI below £12,570; no Income Tax within the Personal Allowance | Salary and employer NI are both deductible for CT. Above £6,708 it earns a qualifying year for State Pension. A company whose only employee paid above the Secondary Threshold is its sole director cannot claim the £10,500 Employment Allowance. |
| Salary above £12,570 | 15% employer NI + 8% / 2% employee NI + Income Tax | Usually costs more than taking the same profit as dividends. |
| Dividends covered by the £500 dividend allowance | 0% personal tax | Paid from profit that has already borne Corporation Tax. The allowance uses up band space (ITA 2007 s.13A). |
| Dividends in the basic rate band | 10.75% | Combined with CT at 19% to 25%: 27.71% - 33.06% of the profit. |
| Dividends in the higher rate band | 35.75% | Combined with CT: 47.96% - 51.81%. |
| Dividends in the additional rate band | 39.35% | Combined with CT: 50.87% - 54.51%. |
| Employer pension contribution | No Income Tax or NI on the contribution | Normally deductible for CT if paid wholly and exclusively for the trade (BIM46035). Counts towards the £60,000 annual allowance. Withdrawals are taxable later, apart from the tax-free lump sum, and are available from minimum pension age. |
| Capital distribution on a solvent liquidation | CGT; 18% where BADR applies | BADR has a £1,000,000 lifetime limit and qualifying conditions. ITTOIA s.396B can tax the distribution as income if you carry on a similar trade within 2 years. |
Combined rates are 1 - (1 - CT rate) × (1 - dividend rate), at the 19% small profits rate and the 25% main rate. Employee NI is 8% between £12,570 and £50,270 and 2% above.
Worked example: £100,000 of profit, sole director
| Option | Employer NI | Corporation Tax | Dividends | Dividend tax | Net cash to director | Into pension |
|---|---|---|---|---|---|---|
| Salary £5,000 + dividends | £0 | £21,425 | £73,575 | £14,118 | £64,457 | £0 |
| Salary £12,570 + dividends | £1,136 | £19,118 | £67,176 | £14,537 | £65,210 | £0 |
| Salary £12,570 + £20,000 employer pension + dividends | £1,136 | £13,818 | £52,476 | £9,282 | £55,765 | £20,000 |
Computed with our salary vs dividend calculator engine: no Employment Allowance, no associated companies, no other income, England. The pension contribution is treated as fully deductible. Pension withdrawals are taxable later and are not shown.
Related guides
- UK Dividend Tax 2026/27 Director Strategy - dividend-specific deep dive.
- UK Director Pension Strategies 2026/27 - employer pension detail.
- UK Optimum Director Salary 2026/27 - salary level optimisation.
- UK Corporation Tax Marginal Relief 2026/27 - the marginal relief band.
- UK Limited Company MVL Closure 2026/27 - exit strategy.
Frequently asked questions
What's the optimal director salary in 2026/27?
Work it out on the numbers rather than a rule of thumb. Salary up to £12,570 costs no employee NI or Income Tax, and both the salary and any employer NI are deductible for Corporation Tax. Without the Employment Allowance, salary above £5,000 costs 15% employer NI, but in our £100,000 profit example a £12,570 salary still leaves the director £753 better off than £5,000, because of the CT saved. A salary of at least £6,708 also earns a National Insurance qualifying year; £5,000 does not.
Why are dividends usually better than salary?
Dividends carry no National Insurance and are taxed at 10.75% / 35.75% / 39.35%, with the first £500 covered by the dividend allowance. But they come out of profit that has already paid Corporation Tax, so the fair comparison is combined: in the basic rate band, 27.71% - 33.06% of the profit goes in tax depending on the company's CT rate, against salary costing 15% employer NI plus 8% employee NI and 20% Income Tax, partly offset by CT relief on the salary and employer NI.
When does an employer pension contribution beat dividends?
A contribution to a registered pension scheme is not taxable on the director (ITEPA 2003 s.308), carries no NI and is normally deductible for the company, so £10,000 into a pension costs the company £7,500 to £8,100 after CT relief at 25% or 19%. The trade-off is access: the money is locked in until minimum pension age, and withdrawals beyond the tax-free lump sum are taxed as income then. HMRC can challenge contributions where the whole remuneration package is excessive for the work done (BIM46035).
What changed for dividends in 2026/27?
From 6 April 2026 the ordinary dividend rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%; the additional rate stayed at 39.35% (gov.uk). A director taking a £12,570 salary and dividends up to the basic rate limit pays £744 more a year. Between £50,000 and £250,000 of profit, marginal relief makes the effective CT rate on each extra pound 26.5%.
What's the worked example for £100k profit?
Sole director, £100,000 of profit before director pay, no Employment Allowance, all remaining profit paid as dividends, England. Salary £5,000: CT £21,425, dividends £73,575, dividend tax £14,118, net to director £64,457. Salary £12,570: employer NI £1,136, CT £19,118, dividend tax £14,537, net £65,210. Salary £12,570 plus a £20,000 employer pension contribution: CT £13,818, dividend tax £9,282, net cash £55,765 plus £20,000 in the pension. See the table below.
How do I handle accumulated profit in the company?
Profit left in the company has already paid CT and is taxed again only when extracted. Spreading dividends over several years can keep more of them in the basic rate band. On a solvent liquidation, distributions are normally capital: where Business Asset Disposal Relief applies, gains are taxed at 18% from 6 April 2026 (gov.uk), subject to the qualifying conditions and the £1,000,000 lifetime limit. Illustration: £400,000 paid as a dividend in one year with no other income costs £143,416 in dividend tax; as a qualifying capital distribution, £71,460 after the £3,000 annual exempt amount, before liquidator fees. The anti-avoidance rule in ITTOIA s.396B can treat it as income instead if you carry on a similar activity within 2 years.
Can I give shares to my spouse to use their allowances?
Dividends on shares you give away can be taxed on you under the settlements rules (ITTOIA 2005 s.624). There is an exception for an outright gift between spouses or civil partners, but not where the gift is wholly or substantially a right to income, such as shares carrying only dividend rights (s.626). Shares need to be ordinary shares the spouse genuinely owns, with full rights. Gifts to your own minor children are treated differently again. Take advice before issuing or transferring shares for this purpose.