Before the Year Turns: A Director's Pay-Mix Audit for 2026-27

For the owner-manager of a small company, pay is rarely a single decision. It is a mixture of salary, dividends, pension contributions and, sometimes, a director's loan account. Each route has a different legal character and a different tax consequence. As 2026-27 approaches its final months, the useful question is not simply whether one route looks cheaper than another. It is whether the mix remains lawful, documented and consistent with the company's cash position.

A checkpoint, not a calculator

Remuneration planning is often presented as a rates exercise. In practice, the more valuable discipline is a calm review of how the company has actually paid its director during the year. Has salary been reported through payroll? Have dividends been supported by sufficient distributable profits? Is the director's loan account clear? These questions matter more than a marginal difference in tax rates, because an unlawful distribution or an unexplained loan can create costs that no rate table anticipates.

The review should therefore be evidence-led. Start with the company's accounts, payroll records and board paperwork, not with an online calculator.

Profit first: the dividend test

A dividend is a distribution of profit, not a payment for work. That distinction is fundamental. A company may only pay a dividend out of profits available for distribution, after taking account of accumulated losses, liabilities and any legal restrictions in the articles. A healthy bank balance is not, by itself, proof that distributable profits exist. Cash may be needed for tax, suppliers or working capital.

Before declaring further dividends in 2026-27, the director should review management accounts and retained earnings. If the company has already paid dividends that exceed available profits, the correct response is not to ignore the gap. It should be discussed with an accountant promptly. Possible remedies include repaying the amount, reclassifying it as salary where appropriate, or correcting the accounts. Each route has different tax and legal consequences.

Salary: deductible, but not free

Salary is usually the most straightforward route because it is linked to employment. If the salary is paid wholly and exclusively for the purposes of the company's trade, it is generally deductible for corporation tax, together with the employer's National Insurance contributions. That deduction is a real commercial benefit, but it does not make salary costless. Payroll taxes, employee National Insurance and pension obligations still apply.

The familiar 2026-27 reference points remain useful for planning: the £12,570 personal allowance and employee primary threshold, and the £5,000 employer secondary threshold. A salary set around the primary threshold is often used to preserve a National Insurance record and to secure corporation tax relief without generating employee National Insurance. That approach is not universally right. A director with other income, a pension contribution strategy or a desire to avoid a small salary may reach a different conclusion. The figures should be checked against the payroll period and the director's wider circumstances.

Dividends and the £500 allowance

Dividends are taxed through Self Assessment, and the £500 dividend allowance remains part of the 2026-27 landscape. The allowance is often misunderstood. It does not create £500 of tax-free income in the way the personal allowance does; instead, it reduces the amount of dividend income charged at dividend rates. Dividends within the allowance still count towards total income and can affect the band into which other income falls.

Dividend tax rates continue to apply according to the taxpayer's marginal band, and the interaction with salary, savings income and the personal allowance should be considered as a whole. The practical point for the owner-manager is simpler: dividends should be declared deliberately, with reference to the company's profits and the director's total income, rather than treated as a flexible top-up whenever cash is needed.

Paperwork that makes a dividend real

A dividend is not legally valid merely because money has moved or an entry has been made in the accounts. The company should have a board minute or written resolution declaring the dividend, and a dividend voucher for each shareholder. The voucher should show the date, the company name, the shareholder's name, the amount and the class of shares. The dividend should be paid in proportion to shareholdings unless the articles provide otherwise.

Retrospective paperwork is a poor substitute for contemporaneous records. If a dividend was paid without a minute or voucher, the director should regularise the position as soon as possible and take advice on any tax already reported. HMRC may look at the substance of the arrangement, not just the label applied to it.

Director's loans and the cost of informality

A director's loan account often reveals whether the pay mix has stayed under control. Personal expenses paid by the company, dividends paid without sufficient profits, or salary advanced before payroll can all leave the account overdrawn. If the loan remains outstanding nine months and one day after the company's year-end, a tax charge may arise on the company. Larger loans can also create a benefit-in-kind charge for the director.

The sensible approach is to reconcile the loan account before the year-end, not after HMRC enquires. Repayment, a formal dividend where profits allow, or a salary resolution may be appropriate, but the choice should be documented and reflected in the company's records.

A measured pre-year-end checklist

A practical audit for 2026-27 should cover the following: review management accounts and distributable reserves; confirm that salary and bonuses have been processed through payroll; check dividend minutes and vouchers; reconcile the director's loan account; consider pension contributions and their commercial rationale; and document why the chosen mix was adopted. The aim is not to produce a perfect theoretical answer, but a defensible one.

Owner-managers do not need to turn remuneration into an annual puzzle. They need a clear record that salary was earned and reported, dividends were paid from real profits, and any loan was identified and managed. That is the quieter, more durable form of tax planning.