For most director-shareholders the lowest-tax route is still a small salary topped up with dividends, because dividends carry no National Insurance and sit at lower headline rates than salary. The usual base is a £12,570 salary plus dividends on top. What changed in April 2026 is the price of those dividends: the basic rate rose to 10.75% and the higher rate to 35.75%, so the gap between salary and dividends narrowed and the split is worth rechecking for your own figures.
This guide shows how the two forms of pay are taxed, where the efficient line sits for 2026/27, and the handful of situations where salary now wins. The numbers are illustrative and the right answer depends on your profit level and whether your company can claim the Employment Allowance.
Key takeaways
- Small salary plus dividends still wins for most. A £12,570 salary uses the personal allowance and counts for the state pension.
- Dividends got dearer in April 2026. Basic rate is 10.75% and higher rate 35.75%, each up two points.
- The £500 dividend allowance is small. It has fallen from £2,000 in 2022/23, so it shelters very little now.
- Salary is deductible, dividends are not. Salary cuts corporation tax; dividends come from profit after tax.
- Employment Allowance changes the answer. Companies that can claim the £10,500 allowance can often afford a higher salary efficiently.
Not sure which split suits your company? Book a free 15-minute business call and we will model the salary and dividend mix that leaves the most in your pocket this year.
Book a video call or a call back. We will model your split against the 2026/27 rates and show you the most efficient way to take your money this year.
What the April 2026 rise can add on a £100,000 extraction. A quick pay review is how you plan around it.
What is the most tax-efficient split in 2026/27?
For most directors the efficient answer is a salary of £12,570 and the rest of your income taken as dividends. That salary sits exactly at the personal allowance and the employee National Insurance threshold, so you pay no income tax and no employee NI on it. Above the £5,000 secondary threshold the company pays employer NI at 15%, which is £1,135.50 on the full salary, but the corporation tax relief on the salary and that NI normally outweighs the cost, leaving a net saving versus taking the same amount as dividends.
Dividends then top up your income from the company's post-tax profit. They attract no National Insurance at all, which is the heart of why the salary-plus-dividend structure works. The question is no longer whether to use dividends, but how the higher 2026/27 rates change the size of the prize.
Why a £12,570 salary is usually the right base
A salary at the personal allowance does three useful things at once. It draws income with no income tax. It keeps you above the £6,708 lower earnings limit, so the year counts towards your state pension. And it creates a corporation tax deduction the company would not get from a dividend. The only cost is the employer NI above £5,000, which runs through your payroll each month.
Where your company employs other people, or has a second director, it can usually claim the Employment Allowance of £10,500, which wipes out that employer NI entirely. A sole director with no other staff cannot claim it, so the company carries the £1,135.50. Even then the maths favours £12,570 for most, because the corporation tax saved on the larger salary beats the NI. A lower salary of £6,708 is the alternative some sole directors prefer; it still earns a qualifying pension year and trims the employer NI to about £256.
How dividends are taxed on top of your salary
Dividends are the top slice of your income, stacked above salary and any other earnings. The first £500 is covered by the dividend allowance and taxed at 0%, though it still uses up part of your basic rate band. After that, dividends are taxed at 10.75% inside the basic band, 35.75% in the higher band and 39.35% in the additional band for 2026/27. The basic band runs to £50,270 and the higher band to £125,140.
Once total income passes it, the personal allowance tapers away at £1 for every £2 of income, creating a 60% effective rate on the slice up to £125,140. Directors close to that figure often hold dividends back and route surplus profit into a pension instead, which we cover in our guide on using pensions in a business tax plan.
Illustrative for a UK-resident director on the 2026/27 rates. Assumes no other income, no pension contribution and no Employment Allowance, and excludes the company's own corporation tax and employer NI. Not a substitute for advice.
Worked example: a basic-rate director
Take a sole director on a £12,570 salary who draws £37,700 of dividends, keeping total income at the £50,270 higher-rate threshold. The salary carries no income tax or employee NI. Of the dividends, £500 is tax-free and the remaining £37,200 is taxed at 10.75%, which is £3,999. Total personal tax for the year is around £4,000 on £50,270 of income, before the company's own employer NI and corporation tax. The same £37,200 of dividends would have cost £3,255 at the old 8.75% rate, so the April 2026 change added £744 on this profile alone.
Worked example: extracting around £100,000
Now take a director extracting £100,000 in total: a £12,570 salary and £87,430 of dividends. The basic-band dividends, £37,200 after the allowance, are taxed at 10.75%, giving £3,999. The £49,730 sitting in the higher band is taxed at 35.75%, giving £17,778. Total dividend tax is about £21,777. Under the 2025/26 rates the same extraction cost roughly £20,038, so the rate rise costs this director close to £1,740 more for taking exactly the same money. That is the figure that makes a fresh look at salary worthwhile.
When salary now beats dividends
The dividend rise plus a frozen £5,000 secondary threshold has tilted the maths in three cases. Where the Employment Allowance covers the employer NI, a higher salary becomes attractive because it is fully deductible and avoids the dearer dividend rates. Where company profits fall in the 26.5% marginal corporation tax band between £50,000 and £250,000, the relief on salary is worth more, so paying more salary can beat paying more dividends. And a director already at state pension age pays no employee NI, which removes one of salary's drawbacks. These are judgement calls on real numbers, not rules of thumb, which is why we run the comparison for each client through our corporation tax and personal tax planning.
Getting that comparison done properly is usually worth more than the fee. A single call with the right figures in front of us often changes what a director draws for the rest of the year.
"After phone consultation I've saved a few thousand pounds. Excellent service, very helpful and friendly people."
Lukasz C., e-commerce client, February 2020Pay is one piece of it. See how we plan the books, the reporting and the tax for directors across the whole year.
Is your salary and dividend split still efficient?
Five short questions on how you pay yourself. At the end you will get an honest read on whether your split is fine or worth a proper look under the 2026/27 rates. Either way, the next step is a free 15-minute call.
Mistakes we see directors make
- Declaring dividends with no profit. A dividend can only come from distributable profit after corporation tax. Pay one the company cannot support and it becomes a director's loan, with its own tax charge.
- Skipping dividend paperwork. Each dividend needs a board minute and a voucher. HMRC can challenge undocumented withdrawals and treat them as salary or a loan.
- Ignoring the £100,000 trap. Drawing past £100,000 quietly triggers the 60% allowance taper. A pension contribution often beats the marginal dividend.
- Forgetting the perks are taxed too. A company car or medical cover is a benefit in kind on top of your pay, and it changes the total picture.
- Setting pay once and forgetting it. Thresholds, rates and your profit move every year. A pay plan set in 2023 is unlikely to be efficient now.
Related reading for directors
The shrinking dividend allowance
Why the allowance fell to £500 and what it means for your withdrawals.
Read the article → Tax planningUsing pensions in a business tax plan
An efficient route past the £100,000 taper and the dearer dividend rates.
Read the article → ComplianceDirector's loan accounts and s455
What happens when a dividend is drawn ahead of the profit to support it.
Read the article →Frequently asked questions
Is it still worth taking dividends after the 2026 rise?
Yes, for most directors. Dividends carry no National Insurance, so even at 10.75% and 35.75% they usually beat the same income taken as salary. The rise has narrowed the gap rather than closed it, and it has made salary the better choice in some specific cases.
How much salary should a director take in 2026/27?
For most, £12,570. It uses the personal allowance, counts towards the state pension and creates a corporation tax deduction. A sole director who wants to minimise employer NI might choose £6,708 instead, accepting a slightly smaller corporation tax saving.
Do dividends count towards my state pension?
No. Only salary above the lower earnings limit, which is £6,708 for 2026/27, builds your National Insurance record. That is one reason directors keep a salary in the mix rather than taking everything as dividends.
Can I pay myself a dividend whenever I like?
Only from distributable profit, and with the right paperwork. You can pay dividends through the year if the profit is there, supported by a board minute and a dividend voucher each time. Drawing ahead of profit creates a loan, not a dividend.
What if my income goes over £100,000?
Your personal allowance starts to taper, producing a 60% effective rate up to £125,140. Many directors at this level redirect surplus into an employer pension contribution, which is deductible for the company and sidesteps the taper.
Plan your pay with a regulated team
Total Books Accountants Ltd is a regulated, founder-led practice of limited company accountants, led by Buhir Rafiq with more than 30 years in accounting and finance. We are AAT licensed, an HMRC registered tax agent, a Companies House authorised agent and a Xero Certified Advisor. We work from offices in Cardiff, Newport and Bristol, and UK-wide through our Virtual Finance Office with secure digital onboarding.
Book a free 15-minute business call and we will show you the most efficient way to take your money this year.
This guide is general information, not advice for your specific situation. Tax rules change and the right split depends on your circumstances. Completing your returns remains the responsibility of the taxpayer; please take professional advice before acting.
