Every director pay plan is built on a short list of published thresholds. Here they are for 2026/27.

Personal tax

• Personal allowance: £12,570, reducing once adjusted net income passes £100,000.
• Basic rate band: £37,700 of taxable income, taxed at 20% on salary.
• Higher rate: 40% on salary up to £125,140, then 45% above that.
• Dividend allowance: £500, taxed at 0% but still using up band.
• Dividend rates above the allowance: 10.75% basic, 35.75% higher, 39.35% additional.

National Insurance

• Secondary threshold: £5,000 a year. Employer NI of 15% applies above it.
• Primary threshold: £12,570 a year, where your own employee NI starts.
• Lower earnings limit: £6,708 a year. Earnings at or above this protect a state pension qualifying year.

Company tax

Corporation tax at the time of writing runs at 19% on profits to £50,000 and 25% above £250,000, with marginal relief between. Associated companies reduce those limits, which catches directors who hold more than one trading company.

Scottish taxpayers use different rates and bands on salary. Dividend rates are the same across the UK, so a Scottish director’s split rarely matches an English one.

Salary is not free to the company, and dividends are not free to it either. Both sides belong in the planner.

Salary and the employer National Insurance on it are normally deductible when the company works out its corporation tax, provided the pay is commercially justifiable. Dividends are paid out of profit that has already been taxed, so they get no deduction at all.

Where employer National Insurance bites

Above £5,000 of annual earnings, the company pays 15%. Take a salary of £12,570 and the employer cost is £1,135.50 for the year. Some of that comes back through the corporation tax deduction, which is why the answer depends on your profit level.

Employment Allowance can remove that cost, but a company whose only employee is a single director is usually excluded. If your spouse or a member of staff is also on the payroll, the position changes, and it is worth checking properly rather than assuming.

An illustration, not a recommendation

Take a director on a salary of £12,570 with dividends of £37,700, so total income of £50,270. The dividend allowance covers £500. The remaining £37,200 is taxed at 10.75%, giving personal tax of roughly £4,000 for the year, payable through self assessment. Company-side, the salary and employer NI reduce taxable profit by about £13,700.

Those figures are illustrative and assume no other income. Add rental profit, a pension in payment or a working spouse and the outcome moves.

A dividend is only lawful if the company has enough distributable profit to cover it. Cash in the account proves nothing.

Distributable profit means accumulated profit after corporation tax, less dividends already paid. A company sitting on VAT collected, a corporation tax provision and customer deposits can look wealthy and still have no headroom.

How to work out the headroom

1. Start with retained profit from the last filed accounts.
2. Add profit earned since that year end, after allowing for corporation tax.
3. Deduct every dividend voted since the last year end.
4. What remains is the maximum you can legally vote.

What happens when you get it wrong

Overdrawn drawings that cannot be covered by profit are treated as a loan from the company to you. Any balance still outstanding nine months and one day after the year end triggers a tax charge on the company, and a benefit in kind can arise on the interest. HMRC can also challenge the dividend itself if the paperwork was never there.

Keep the paperwork light but real: a board minute recording the decision, and a dividend voucher for each payment. That takes minutes and settles arguments years later.

The point of forecasting headroom before the year end is simple. You get to decide what to draw while there is still time to change it.

The usual small salary and dividend split fits a single-director company with steady profits and no other income. Several things break it.

Income approaching £100,000

Above £100,000 of adjusted net income, the personal allowance falls by £1 for every £2, disappearing at £125,140. The effective rate on income in that band is punishing. Directors who cross it without planning often pay more than they expected on the last slice of dividends.

Other income in the mix

Rental profit, a part-time employment, interest or a pension all sit under your dividends in the band order. A property portfolio can push dividends into the 35.75% rate even when the company profit has not changed.

More than one shareholder

Dividends must follow shareholdings. If you hold 50% and your spouse holds 50%, you cannot pay them a different proportion because their other income differs. Alphabet shares can address this, and they bring settlements legislation and commercial questions with them. Get that one checked before you file anything at Companies House.

Other reasons to take more salary

• Research and development claims: salary and employer pension contributions qualify, dividends do not.
• Mortgage applications: some lenders weigh salary and retained profit differently from dividends.
• Statutory maternity pay and other earnings-related entitlements.

None of these makes a low salary wrong. They mean the planner needs your circumstances in it, not an average director’s.

A third route exists between salary and dividends, and it changes the maths for higher earners.

An employer pension contribution is paid by the company straight to your pension. There is no National Insurance on it, no income tax charge now, and the company normally gets a corporation tax deduction in the period it is paid, provided the contribution is wholly and exclusively for the trade.

Where it helps most

• Directors whose income is heading past £100,000, where the personal allowance is tapering away.
• Companies with profit above the small profits limit, where the deduction is worth more.
• Owners who intend to leave money in the business anyway and have no plan for it.

What to check first

Contributions are limited by the annual allowance, with carry forward available from the three previous years if the scheme was in place. High earners can have a tapered allowance. The contribution must be paid before the company year end to land in that year’s accounts, not merely promised.

Pensions lock money away until retirement age, so this is a cash flow decision as much as a tax one. If the company needs that money for a hire or equipment in eighteen months, the deduction is not worth the squeeze. Take regulated pension advice on the product itself; your accountant’s role is the tax and the timing.

Two dates decide how much tax a dividend attracts: the day it is voted, and which tax year that falls in.

A dividend is taxed in the tax year it is declared and made available, so a payment voted on 4 April and one voted on 7 April land in different years. Directors with an unusually strong year can sometimes hold part of a distribution into the new tax year and keep both years inside the basic rate band.

The knock-on effects to plan for

• Self assessment: tax on dividends is paid the following 31 January, with payments on account often added.
• The first year you cross into payments on account, January can carry one and a half years of tax.
• Directors’ National Insurance uses an annual earnings period, so an irregular bonus can produce an NI bill part way through the year.
• Corporation tax is due nine months and one day after the year end, and that cash has to survive your drawings.

A simple routine

Review profit and headroom quarterly. Vote dividends on a set date with a minute and a voucher. Move the tax portion into a separate account each time. The routine matters more than precision, because the numbers only help if they are current when a decision turns up.