Key points
- For most directors the best way is a combination: a small salary through payroll, and the rest as dividends.
- The size of the salary matters. A salary of £12,570 with the rest in dividends costs £4,100 less tax than a £45,000 salary on the same £60,000 profit.
- Since 6 April 2026, dividends are taxed at 10.75% and 35.75%, two points more than before. If you take all your profit out every year, a company is no longer automatically cheaper than being self-employed.
- Dividends bring a Self Assessment bill, and often payments on account. Plan your cash for 31 January.
First question: how should your profit work for you?
Before you compare taxes, decide what you want from your profit. The answer points to the right structure.
Self-employed
- Your profit works for you today: everything you earn is yours.
- But you are the business. If something goes wrong, your savings and property can be at risk.
Limited company
- The company is a separate person. Its money is not your money, even if you own every share.
- You can build reserves, invest and grow while paying less tax, and choose when to take money out. On the way out, you pay tax again.
Five ways, one profit
We compared the same £60,000 of profit, before paying the owner, for a person with no other income. These are figures from our own tax calculator for 2026/27.
| £60,000 profit | Self-employed | Salary only | Dividends only | Small salary + dividends | Large salary + dividends |
|---|---|---|---|---|---|
| Salary | — | £52,826 | — | £12,570 | £45,000 |
| Dividends | — | — | £47,850 | £37,499 | £7,290 |
| Corporation Tax | — | — | £12,150 | £8,796 | £1,710 |
| Employer National Insurance | — | £7,174 | — | £1,136 | £6,000 |
| Income Tax on salary or profit | £11,432 | £8,562 | — | — | £6,486 |
| Employee or Class 4 National Insurance | £2,457 | £3,067 | — | — | £2,594 |
| Dividend Tax | — | — | £3,739 | £3,977 | £1,235 |
| Total tax and NI | £13,889 | £18,803 | £15,889 | £13,909 | £18,025 |
| In your pocket | £46,111 | £41,197 | £44,111 | £46,091 | £41,975 |
| Effective rate | 23.1% | 31.3% | 26.5% | 23.2% | 30.0% |
England, Wales and Northern Ireland rates for 2026/27. One company, no other income, no Employment Allowance, no pension or student loan. All profit is paid out in the year.
Three things stand out:
- Salary only is the most expensive. On top of Income Tax and your own National Insurance, the company pays 15% employer National Insurance on everything above £5,000.
- A mix is only good if the salary is right. With a £45,000 salary, the mix costs almost as much as salary only. With £12,570, it is the cheapest way to take money out of a company.
- Self-employed is now just as cheap when all the profit is taken out. The company wins in other ways, which we explain below. And with income at this level, a self-employed person must keep digital records and send five reports a year under Making Tax Digital, so the bookkeeping is not much simpler.
How a salary works
A salary is paid through payroll, and the company reports it to HMRC on or before every payday. It reduces the company's profit, so it saves Corporation Tax. But it carries National Insurance on both sides: 8% for you between £12,570 and £50,270, and 15% for the company above £5,000 a year.
At £12,570 you pay no Income Tax and no employee National Insurance, because it is your Personal Allowance. The company pays £1,136 of employer National Insurance, but saves more than that in Corporation Tax. And a salary at this level gives you a qualifying year for your State Pension.
A salary has one more advantage: the company can pay it even in a month or a year when it makes a loss. Dividends cannot be paid then.
If your company has other employees, it may be able to claim the Employment Allowance of up to £10,500 a year, which changes the best salary. A company whose only paid employee is the director cannot claim it.
How dividends work
Dividends are paid to shareholders out of profit that is left after Corporation Tax. They do not reduce the company's tax, and there is no National Insurance on them.
- The first £500 a year is tax-free (the dividend allowance).
- From 6 April 2026: 10.75% in the basic rate band, 35.75% in the higher rate band, and 39.35% above £125,140.
- You report dividends on your own Self Assessment return and pay the tax by 31 January after the tax year.
A company can only pay dividends out of its accumulated profits. If it pays a dividend when there is not enough profit, the dividend is unlawful, and a director who knew can be required to pay it back. Each dividend needs a board minute and a dividend voucher. Without them, HMRC can treat the money as a director's loan or as salary.
This means you cannot skip the bookkeeping, pay yourself dividends all year and hand everything to your accountant at the end. Work for a month, two months or a quarter, let your accountant prepare interim figures and tell you how much profit is available, and only then pay the dividend. If the company made losses in earlier years, they have to be covered first.
The January trap: payments on account
With a salary, tax is taken every month through payroll. With dividends or self-employed profit, the tax comes in one bill. And if that bill is more than £1,000, HMRC also asks you to pay half of next year's tax in advance: a payment on account.
Self-employed, £60,000
- 31 January: £13,889 for the year + £6,944 in advance = £20,833
- 31 July: another £6,944
Dividends only, £60,000
- 31 January: £3,739 for the year + £1,869 in advance = £5,608
- 31 July: another £1,869
In the first year this is a real shock if the money has already been spent. Put the tax aside every month, in a separate account.
When a company wins
If self-employment costs the same, why have a company? Because most businesses do not take every pound out every year.
- Profit you leave in the company is taxed only at Corporation Tax, from 19%. You can reinvest it, or take it later in a year when your income is lower.
- Pension contributions paid by the company reduce its profit and carry no National Insurance.
- Limited liability: the company's debts are, in most cases, not your personal debts.
- Higher profits: the larger the profit you keep in the business, the bigger the advantage.
Mistakes we see
- Money taken with no payroll and no dividend paperworkIt becomes a director's loan, with an extra 35.75% tax on the company if it is not cleared in time. Read year-end accounts.
- Dividends with no profit behind themOften found only at the year end, when the accounts show a loss.
- A salary that is too highPaying £45,000 through payroll "because it feels safer" can cost thousands in National Insurance.
- Forgetting the Self Assessment billDividend tax is not taken at source. Many directors only find out in January.
Find your best mix
Estimate for 2026/27, England, Wales and Northern Ireland. One company, no other income, all profit paid out, no Employment Allowance, pension or student loan. Not advice for your situation.
What to bring to your consultation
0 of 6 ready
One piece of advice
Everything depends on your situation and your figures. But in most cases the best way is to combine a salary and dividends, planned at the start of the year, not at the end.
Test yourself
1. Which way of taking £60,000 of profit costs the most tax in 2026/27?
Salary only carries National Insurance on both sides, including 15% for the company.
2. Can a company pay a dividend in a year when it has made a loss and has no profits from earlier years?
Dividends can only come from accumulated profits. Otherwise they are unlawful.
3. What is the tax rate on dividends in the basic rate band from 6 April 2026?
It rose from 8.75% to 10.75%. The higher rate rose from 33.75% to 35.75%.
4. Your Self Assessment bill is £3,739. What do you pay on 31 January?
The bill plus the first payment on account, half of the bill, towards next year.
Law and sources
- GOV.UK: tax on dividends£500 allowance; 10.75%, 35.75% and 39.35% from 6 April 2026
- GOV.UK: Income Tax rates and Personal Allowances£12,570 Personal Allowance, £50,270 higher rate threshold
- GOV.UK: rates and thresholds for employersEmployer National Insurance 15% above £5,000; employee 8% and 2%
- GOV.UK: Corporation Tax rates19% up to £50,000, 25% from £250,000, marginal relief between
- GOV.UK: Employment AllowanceNot available where the director is the only employee paid above the secondary threshold
- Companies Act 2006, sections 830 and 847Dividends only from distributable profits; unlawful dividends must be repaid
- GOV.UK: payments on accountAdvance payments when your Self Assessment bill is over £1,000
- GOV.UK: taking money out of a limited companySalary, dividends and director's loans
This guide explains the rules in general terms as at 4 October 2026. It is not advice for your situation. Rates change every year.
