Tax
Corporation Tax Explained for Limited Companies
What is corporation tax, how much do you pay, and when? A clear guide to corporation tax for UK limited companies, including 2026 rates.
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Tax-Efficient Director Pay: A How-To Guide
A practical guide to splitting salary and dividends tax-efficiently as a UK company director in 2026/27, with worked examples and a free calculator.
By Callum Sommerton28 September 20266 min read
Why the salary/dividend split matters
If you run your own UK limited company, you control three separate tax systems at once: Income Tax and National Insurance on any salary you pay yourself, Corporation Tax (Corporation Tax Explained for Limited Companies) on what your company keeps, and dividend tax on anything you draw out afterwards. How you split your pay between salary and dividends changes how much of your profit HMRC takes, and how much stays with you.
This guide covers the current 2026/27 rates, works through a real example using FOUNDRS' own Pay Yourself Calculator, and flags the rules you need to get right before you pay yourself anything.
This is general guidance, not personal tax advice. Always check your own numbers before you file.
How salary, dividends and pensions are taxed
Your salary is a deductible business expense, so it lowers your company's Corporation Tax bill, but it's subject to Income Tax and National Insurance. Dividends are paid out of profit after Corporation Tax, so they don't reduce your Corporation Tax bill, but they carry no National Insurance at all. Pension contributions made by your company are deductible too, and carry no National Insurance or Income Tax until you draw them in retirement. That's the whole trade-off in one paragraph; everything else is detail.
The 2026/27 numbers
Lever | Reduces Corporation Tax? | National Insurance | Tax you pay |
Salary (PAYE) | Yes | Employee: 8% on £12,571–£50,270, 2% above. Employer: 15% above £5,000/yr | Income Tax:
|
Dividends | No - paid from after-tax profit | None | 10.75% (basic), 35.75% (higher), 39.35% (additional) on dividends above the £500 allowance |
Employer pension contribution | Yes | None | None now (taxed on withdrawal in retirement) |
Corporation Tax itself is tiered: 19% on profits up to £50,000 (the small profits rate), 25% on profits over £250,000, and marginal relief tapers you between the two in between.
One rule that trips people up: most single-director companies with no other employees can't claim Employment Allowance (the £10,500 discount on employer NI), because HMRC requires more than one employee liable for secondary Class 1 NI. Don't assume it applies - please check eligibility before you rely on it.
Worked example: two common salary levels
The classic advice is "a low salary topped up with dividends", usually pointing at one of two figures: £9,100 (a historic employer NI secondary threshold) or £12,570 (the full personal allowance, so no Income Tax or employee NI on the salary itself).
Which one wins depends on your company's profit. Here's both, run through the Pay Yourself Calculator for a sole director with £60,000 of company profit before pay, no other income, and Employment Allowance not claimed:
Salary £12,570 | Salary £9,100 | |
Net salary | £12,570 | £9,100 |
Dividends after tax | £33,521 | £36,760 |
Corporation Tax | −£8,796 | −£9,576 |
Employer's NI | −£1,136 | −£615 |
Income Tax on salary | £0 | £0 |
Employee's NI | £0 | £0 |
Dividend tax | −£3,977 | −£3,949 |
Take-home | £46,091 | £45,860 |
Effective tax rate | 23.2% | 23.6% |
At this profit level, £12,570 comes out very slightly ahead — the extra Employer's NI it triggers costs less than the Corporation Tax saved by the bigger salary deduction. That balance shifts at other profit levels, so the honest answer is: there's no single "most tax-efficient salary" that works for every company. Run your own profit and salary through the calculator rather than copying a number from a blog post.
Source: Pay Yourself Calculator, knowledge.foundrs.ai, as of September 2026, 2026/27 rates. Illustrative only, not tax advice.
Beyond salary and dividends
Pension contributions. If your company pays into your pension directly (rather than you contributing from taxed income), it's a deductible expense with no National Insurance and no Income Tax due until you draw it in retirement. For a profitable company, this is often the single most efficient way to extract value — just be aware of the annual allowance (currently £60,000 for most people, tapered for very high earners).
Benefits in kind. Anything else the company provides you personally — a car, health insurance, gym membership — usually counts as a benefit in kind, reported on a P11D, and taxed accordingly. It rarely beats salary or dividends purely on tax grounds, but can make sense for genuine business needs.
Timing dividends across tax years. Because the £500 dividend allowance and your basic-rate band reset every 6 April, splitting a large dividend across two tax years (where cash flow allows) can keep more of it in a lower band.
Spouse or co-founder shareholdings. Paying dividends to a lower-earning spouse who's a genuine shareholder can use their allowance and lower rate band too — but HMRC's settlements legislation looks closely at dividend waivers and share splits that don't reflect real economic ownership. Get this structured properly rather than improvising it. Understanding Shareholders and Share Structure in a UK Limited Company
Common mistakes to avoid
Paying a salary before you're registered as an employer. If your company pays anyone, including you, a salary, it needs to be registered for PAYE with HMRC first.
Paying dividends without checking there's enough distributable profit, or without recording a board resolution approving them. Dividends paid out of profits that don't exist are unlawful and HMRC can recharacterise them.
Treating the £500 dividend allowance as extra tax-free income on top of everything else. It just means no tax on that first £500 of dividends - you still declare all of it.
Assuming Employment Allowance applies. Most single-director, no-other-employee companies don't qualify — check before you factor the £10,500 saving into your numbers.
Copying a "most tax-efficient salary" figure from a blog post. The right split depends on your own profit, other income, student loan plan and pension contributions. Re-run the calculator with your own numbers.
Ignoring IR35. If the income is caught by the off-payroll working rules, you can't use this salary/dividend split for that contract in the same way (IR35 without the panic
Try it with your own numbers
The fastest way to find your own optimal split is the Pay Yourself Calculator — set your company profit and salary and it works out Corporation Tax, dividend tax and your real take-home for 2026/27. If you're still deciding whether a limited company is right for you at all, the Sole Trader or Limited Company? tool is the step before this one.
