Salary and dividends are taxed on different rails, and that gap is the whole reason the split exists.

Salary is a company cost. It reduces the profit corporation tax is charged on. It also brings PAYE, employee National Insurance, and employer National Insurance at 15% on pay above £5,000 a year.

Dividends work the other way round. They come out of profit after corporation tax, so they save the company nothing. They carry no National Insurance at all, and dividend rates sit below income tax rates.

Put those together and a large director’s salary rarely pays. You hand over National Insurance twice over to buy a corporation tax deduction worth less than the tax you paid to get it.

So the usual shape holds. Salary up to a level that uses the personal allowance and costs little in National Insurance, then dividends on top, within the profit the company genuinely has.

That is the starting point rather than the finished answer. Two companies with identical turnover can land on different salaries once payroll, pensions, and a second shareholder come into it.

Dividend rates rose on 6 April 2026, and that narrowed the advantage dividends hold over salary.

For 2026/27 the rates are 10.75% in the basic rate band, 35.75% in the higher rate band, and 39.35% above that. The dividend allowance stays at £500.

An allowance of £500 is close to a rounding error for a director drawing a full income. Almost every pound you declare is taxed at one of those three rates.

Dividends still cost less than the same money paid as salary, once employer National Insurance is counted on both sides. What changed is the size of that gap, and how much a lazy split now costs you over a year.

There is a cash effect too. Dividend tax is settled through your self assessment rather than deducted when the money leaves the company. Nothing is withheld, so the bill arrives months after the money was spent.

That is why we forecast the corporation tax and the dividend position together, a month before either bill lands. The money is there and the decision is yours.

The right salary depends on whether your company can claim the Employment Allowance.

The allowance cancels the first £10,500 of employer National Insurance each tax year. A sole director who is the only person paid above the secondary threshold cannot claim it.

If you can claim it, a salary at the personal allowance of £12,570 usually leaves no income tax and no National Insurance to pay, assuming nothing else uses that allowance.

If you cannot claim it, employer National Insurance applies to the salary above £5,000. That cost is deductible against corporation tax, which is why £12,570 often still beats a lower figure for a sole director.

Some directors sit nearer the lower earnings limit of £6,708 instead. That is enough to earn a qualifying year towards the State Pension with far less employer National Insurance in play.

These are illustrative 2026/27 figures for a director with no other income. Rental income, a second job, a spouse on the payroll, or Scottish rates on your salary all change the working.

A dividend only counts as a dividend if the profit and the paperwork were both there on the day.

You can declare dividends out of retained profit after corporation tax, from the current year and earlier years. Declare more than that and the payment is unlawful, which usually means repaying it.

The paperwork is light. A board minute declaring the dividend, even with one director, and a voucher showing the date, the company, the shareholder, and the amount.

Where this comes apart is the standing order nobody documents. HMRC treats undocumented drawings as a director’s loan, and an overdrawn loan account brings section 455 tax with it.

Risk profiling picks up splits that sit oddly against the rest of the picture. A small salary, small declared dividends, and a large mortgage is the kind of pattern that attracts a question.

None of this is difficult. It just has to happen at the time, from books that reconcile, rather than being reconstructed at year end from a bank statement.

The standard split assumes one shareholder, no other income, and profit you want to take out.

Change any of those and the answer moves. A spouse who genuinely owns shares has a basic rate band of their own, and using it properly is one of the few real planning wins left in incorporation.

Employer pension contributions are a company cost, so they reduce corporation tax and sit outside the dividend rates completely. For a director already in the higher band, that route often does better than another dividend.

Other income stacks underneath. Rent, a salaried job, or interest all use bands first and push your dividends into a higher rate than you expected.

Mortgage applications are the one place a larger salary can be worth the extra tax. Some lenders still weigh PAYE income more heavily than profit left in the company.

And if the business needs the cash for a hire or a van, taking the maximum dividend because the headroom exists is a decision made without advice. The tax answer and the business answer are two different questions.