Most directors of small companies pay themselves a modest salary through payroll and take the rest as dividends. FreeAgent handles both. The question it will not answer for you is what the salary should be, and the 2026/27 figures make that worth a fresh look.
Our broader guide to paying yourself from a limited company explains why the salary and dividend mix works. This one is the FreeAgent version, with the numbers.
The 2026/27 figures that matter
From HMRC’s rates for employers for 2026/27:
| Threshold | Per year | Per month | What happens above it |
|---|---|---|---|
| Secondary threshold | £5,000 | £417 | Employer pays NI at 15% |
| Lower earnings limit | £6,708 | £559 | The year counts for state pension |
| Primary threshold | £12,570 | £1,048 | Employee pays NI at 8% |
| Personal allowance | £12,570 | Income tax starts |
Corporation tax is 19 per cent on profits up to £50,000 and 25 per cent above £250,000, with marginal relief in between. Dividends are taxed at 10.75 per cent in the basic rate band after a £500 allowance.
Which salary: £12,570 or something lower?
The two salaries directors usually choose between are £12,570 and £6,708. Both keep the state pension year. Both cost the director nothing in income tax or employee National Insurance. The difference is the company’s side.
Taking £12,570 rather than £6,708 means an extra £5,862 of salary. The company pays employer National Insurance of 15 per cent on it, £879.30, but the salary and the National Insurance are both deductible for corporation tax.
For a company paying corporation tax at 19 per cent, the sums look like this:
- Pay it as salary: you receive £5,862, tax free within your personal allowance.
- Leave it as profit: the £6,741.30 the salary and National Insurance would have cost is taxed at 19 per cent, leaving £5,460.45 to pay as a dividend. That dividend also falls within your unused personal allowance, so it is tax free too.
So the higher salary leaves you around £400 better off on these figures, and the gap is wider if the company pays corporation tax at a higher marginal rate. That is why £12,570 is still the common choice, even with employer National Insurance at 15 per cent.
It assumes you have no other income using up your personal allowance. If you have a job elsewhere, rental income or a pension in payment, the answer changes and is worth working through properly.
The single director problem
The Employment Allowance takes up to £10,500 off a company’s employer National Insurance bill, which would wipe out the £879.30 above. But a company whose only employee is its sole director cannot claim it.
If the company has a second employee paid above the secondary threshold, for example another director or a member of staff, the allowance becomes available, and the case for the higher salary gets stronger. The numbers above are the single director, no allowance case.
Running the salary through FreeAgent payroll
FreeAgent runs a monthly payroll and sends the real time information submissions to HMRC for you. It does not support weekly or annual payroll, so for a director that means a monthly salary of £1,047.50 if you are taking £12,570 in equal amounts.
Two practical points:
- Pay the salary every month, actually transferred from the company account, rather than recording it at the year end. A salary that was never paid looks like something else.
- Net salary owed to you is one of the accounts FreeAgent adds into your director’s loan account, so salary that is recorded but not paid sits there as money the company owes you.
Dividends on top
Anything you take above the salary usually comes as dividends, paid out of profits after corporation tax. On top of a £12,570 salary, you can take £37,700 of dividends before reaching the £50,270 higher rate threshold. With the £500 allowance, the tax on that is £3,999.
Above £50,270, dividends are taxed at 35.75 per cent, so whether to take more, leave it in the company or put it into a pension is a real decision. Our guide to recording dividends in FreeAgent covers the minutes, vouchers and the profits check, and our dividend and corporation tax calculator shows the total cost of a given figure.
Plan it before the year end
FreeAgent’s Tax Timeline shows your filing and payment dates, which helps. What it will not do is look at your year as a whole and tell you how much to take, and in which form, before the year closes. That is the most valuable half hour an accountant spends with a small company each year, and it is far more useful in month nine than in month thirteen.
Get your salary and dividends planned before the year end
We set the right salary in your FreeAgent payroll, plan your dividends around your tax bands, and review it with you before your year end, not after. We work with limited companies only, inside your own FreeAgent account, so there is nothing to move. Fixed monthly fees from £145 + VAT, covering your year end accounts, corporation tax return and your own Self Assessment.
Book a Free ConsultationOr see our fixed-fee packages. We work with limited companies across Bedfordshire, Hertfordshire, Buckinghamshire and Northamptonshire, and remotely throughout the UK.
Frequently Asked Questions
Many single director companies take £12,570, the personal allowance, which is also the employee National Insurance primary threshold. On 2026/27 figures that usually leaves the director better off than a lower salary, even though the company pays employer National Insurance on the part above £5,000.
No. If the company has only one director, they must not be the only employee paid above the secondary threshold, so a company whose only employee is its sole director cannot claim it.
Yes, for a monthly payroll. FreeAgent sends the real time information submissions to HMRC but does not support weekly or annual payroll.
Employer National Insurance is 15 per cent on earnings above the secondary threshold of £5,000 a year, which is £417 a month.
Below the lower earnings limit of £6,708 for 2026/27, the year does not count towards your state pension. Between £6,708 and £12,570 it counts, without the director paying employee National Insurance.