The optimal salary/dividend split for contractors in 2026/27 (and why)

The rules for limited company contractors – such as those working through a Personal Service Company (PSC) – have changed. Here’s what you need to know, and what you should be doing about it in the new 2026/27 tax year.

The short answer for limited company directors

• Salary £12,570
• Dividends: £37,700 (taking the total up to the basic rate band and retaining profits or making pension contributions above this level)
• Employer NIC £1,136

Read on to understand why these are the optimal amounts, and when your situation may differ.

Why a £12,570 salary is optimal: the maths

At first glance, paying £1,136 in employer NIC looks like a cost to avoid. It is not.
Both the salary and the employer NIC are deductible business expenses. Together they reduce your company’s taxable profit — and therefore your Corporation Tax (CT) liability.

Calculation (using 19% CT rate)

• Employer NIC cost to company: ~£1,136
• Total deductible: salary (£12,570) + NIC (~£1,136) = £13,706
• Corporation Tax saved at 19%: £2,604
• Net saving after NIC cost: £1,468

At the 26.5% marginal CT rate (profits between £50,000–£250,000), the saving is even greater. In almost all cases, the CT saving outweighs the NIC cost.
On top of this:

• You pay no income tax on your salary
• You pay no employee NIC on the salary
• You get full use of the personal allowance before any dividend income is drawn
• Your state pension qualifying year remains protected

Sole director vs. director with employees

Sole director, no other employees

A single-director company cannot claim Employment Allowance (EA) where the director is the sole employee subject to secondary Class 1 NIC.  Employer NIC of ~£1,136  must be paid by the company on a salary of £12,570, but as shown above, the CT saving still makes it the optimal level of salary to draw.

Director with at least one other eligible employee

A second employee must be within the employer NIC regime (i.e. above £5,000) for the company to qualify for EA of up to £10,500, which reduces your employers NI liability and is claimed through payroll via RTI (Real Time Information) submission software.

Consequently, the employer NIC on a £12,570 salary (~£1,136) is entirely absorbed by the EA claimed. Result: no income tax, no employee NIC, no effective employer NIC, and full CT deduction on the salary. This is the most efficient scenario available.
Eligible employees include a paid spouse, co-director or an administrative employee earning above £5,000.

Dividend strategy: making the most of what’s left

Stay within the basic rate band

After a £12,570 salary, you have room for approximately £37,700 in dividends before crossing into the (unchanged) higher rate band at £50,270. However, from 6 April 2026, dividend tax rates for the basic and higher rate bands have increased by 2%:

• The first £500 of dividend income is tax free in 2026/27 (unchanged from 2025/26)
• In the basic rate band (up to £50,270 total) dividend income is now taxed at 10.75% (up from 8.75% in 2025/26)
• In the higher rate band (£50,271–£125,140) dividend income is now taxed at 35.75% (up from 33.75% in 2025/26)
• In the additional rate band (above £125,140) dividend income is taxed at 39.35% (unchanged from 2025/26)

Be careful not to cross thresholds – 3 key numbers to look out for

1. Avoid crossing the £50,270 threshold to the higher rate, unless you genuinely need the income. Every £10,000 of higher-rate dividends costs £3,575 vs £1075 at basic rate
2. Beyond this level, take care that your total income does not exceed £100,000 in the tax year, where personal allowance tapering begins, creating an effective 60% marginal rate
3. Be aware that the the VAT threshold of £90,000 turnover in the last 12 months is unchanged from the previous year – if you cross this threshold you will have to register for, pay and collect VAT on your services

Other ways to extract profits tax-efficiently

Employer pension contributions
Deductible against CT, no income tax, no NIC. Annual allowance is £60,000 and any unused allowance may be carried forward from the three previous tax years. This is often the most efficient use of profits above the basic rate band.

Spousal dividend splitting
If your spouse holds shares and has lower personal income, their allowances and lower-rate bands can reduce your household tax bill. Get professional advice before implementing.

Full example: £100,000 company profit

Assumptions: sole director/shareholder, outside IR35, no other income, no associated companies, no Employment Allowance.

• Salary: £12,570 | Income tax: £0 | Employee NIC: £0 | Employer NIC: ~£1,136
• Income tax on salary £0
• Employee NIC £0
• Employer NIC ~£1,136
• Taxable profit after salary and NIC ~£86,294
• Corporation Tax at 19% ~£19,118
• Distributable profit after CT ~£67,176
• Dividends to top of basic rate band: £37,700 | Tax-free allowance: £500 | Tax at 10.75% on £37,200: ~£3,999
• Total personal income ~£50,270
• • Remaining profit retained or available for employer pension: ~£29,476

Caveats: when your situation may differ

The guidance above applies to the most common scenario: sole director/shareholder, outside IR35, profits below £50,000. The optimal position changes if:

• Your profits are between £50,000–£250,000 (marginal CT relief applies at 26.5%, strengthening the case for £12,570 salary further)
• You have associated companies (CT band thresholds are divided between them)
• Any of your contracts are inside IR35 (dividend extraction from inside-IR35 income is not permitted).
• From April 2025, the Small Company thresholds for IR35 increased significantly (turnover to £15m, balance sheet to £7.5m), meaning some contractors whose status was previously determined by their client may now self-assess again
• You have other income sources (such as from property, other employment, savings or investments held outside ISA’s) that reduce band capacity
• If you have income from property or sole trading, you should also be aware that Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) starts from 6 April 2026 for those with income above £50,000, and April 2027 for the cohort with income over £30,000. – complete the HMRC MTD questionnaire here to check your status
• You have unused pension annual allowance from prior years (employer contributions may be more efficient than further dividends)
• You are closing or disposing of all or part of your business in the tax year, for example via Members’ Voluntary Liquidation (MVL) you may benefit from Business Asset Disposal Relief (BADR) at 18% which may be lower than the Capital Gains Tax that would otherwise apply

This article reflects confirmed HMRC rules for the 2026/27 tax year. It does not constitute personal tax advice. Always speak to a qualified accountant before changing your remuneration structure — particularly ahead of a mortgage application, a change in IR35 status, or a new tax year.

Mortgaging on a (deliberately) low salary

Limited company directors such as Personal Services Company (PSC) contractors that optimise their salary structure, face a significant hurdle when applying for a mortgage on the High Street.

The problem
The optimal salary outlined above is designed to minimise your tax bill… but most High Street lenders look at what you pay yourself, not what your company earns. Your income on paper may look considerably lower than your actual earning power, when you take into account retained profits for example. That gap can affect how much you can borrow, or whether a lender will consider you at all.

The solution
Make sure you speak to an specialist contractor mortgage broker, such as Freelancer Financials. We pioneered “day-rate underwriting” with contractor-friendly lenders over 20 years ago, so contractors can borrow based on their contract day rate alone, not tax accounts.
Contact our expert broking team today to discuss your mortgages, remortgage or additional loan requirements.