The standard optimal salary strategy 2026/27
For most sole director-shareholder landlord companies, the optimal salary sits at the Secondary Class 1 NI threshold:
- Secondary NI threshold (£9,100/year): no employer or employee NI; deductible against corporation tax; qualifying State Pension year
- Where the Employment Allowance is unavailable (sole director), paying above £9,100 but below £12,570 may save corporation tax with no NI cost — depending on the small profits rate applicability
- Where a spouse is also employed by the company, the Employment Allowance (£5,000 in 2026/27) becomes available, potentially justifying a salary up to £12,570
Dividend extraction — rates and the £500 allowance
- The company pays corporation tax (25% over £250,000; 19-25% small profits rate below £50,000) before dividends are declared
- First £500 of dividend income is tax-free (dividend allowance 2026/27)
- Above the allowance: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate)
- Dividends must be declared formally — board minutes and dividend vouchers required for each payment
- A dividend cannot be paid where there are insufficient distributable reserves
Spouse-shareholder strategy
Tax saving example
A company paying £40,000 in dividends: director (higher rate) pays 33.75%; spouse (basic rate, using their personal allowance) pays 8.75%. Splitting 50/50 saves approximately £5,000/year.
Director's loan account
- An overdrawn DLA at year-end triggers a 33.75% s.455 corporation tax charge on the outstanding balance
- Overdrawn balances above £10,000 also create a benefit in kind (income tax + employer NI on official rate interest)
- Always declare dividends formally before drawing cash — do not treat the DLA as a current account
Total tax comparison
- Retained profits: corporation tax at 19-25% beats income tax at 40-45% for higher-rate taxpayers who can leave profits in the company
- Fully extracted profits: combined corporation tax + dividend tax approaches income tax rates — the company advantage narrows
- Section 24 saving on mortgage interest is the primary driver for mortgaged property portfolios — a company deducts full mortgage interest; individuals are capped at 20% credit