Paying Yourself From a Limited Company: Salary vs Dividends in 2026/27

If you run a limited company, how you pay yourself matters more than ever this year. Dividend tax went up in April 2026, narrowing — but not eliminating — the advantage dividends have long held over salary for company directors.

What changed

From the 2026/27 tax year, dividend tax rates rose by two percentage points: the basic rate climbed to 10.75%, the higher rate to 35.75%, and the additional rate to 39.35%. The tax-free dividend allowance remains just £500 a year — a fraction of what it was before successive governments cut it down from £5,000.

Salary, by contrast, is taxed through PAYE and subject to National Insurance. The standard personal allowance for 2026/27 is £12,570, and directors pay National Insurance on salary above that threshold, while the employer secondary NI threshold sits at £5,000 a year.

Why most directors still use a mix

Despite the dividend tax rise, most tax-efficient strategies for 2026/27 still combine a low salary with dividends rather than choosing one exclusively. A modest salary — often set around the personal allowance or NI thresholds — keeps National Insurance contributions low while still counting toward your state pension record, with the remainder of your income extracted as dividends from company profits after corporation tax.

The right balance depends on your total income, whether you have other employment, and how close you are to higher-rate tax thresholds — this is genuinely a "run the numbers for your situation" decision rather than a one-size-fits-all rule.

Checklist: setting your 2026/27 pay strategy

• Confirm your company has sufficient distributable profit before declaring dividends — dividends can only be paid from retained, post-corporation-tax profit
• Set a salary level with your accountant that balances NI efficiency against maintaining your qualifying years for the state pension
• Check whether your total income (salary + dividends + anything else) pushes you into higher-rate tax bands, since the 35.75% dividend rate applies above the higher-rate threshold
• Keep dividend paperwork in order — board minutes and dividend vouchers are required for every declaration, and HMRC can query undocumented dividends
• Revisit the split at least annually, since allowances and rates change most tax years
• Don't forget corporation tax: profits up to £50,000 are taxed at 19%, with marginal relief up to the 25% rate above £250,000

International comparison

The UK's separation of salary and dividend taxation for owner-directors has few direct equivalents. In the US, S-corporation owners face similar "reasonable salary vs distribution" scrutiny from the IRS, which polices artificially low salaries used to minimise payroll tax — a parallel concern to HMRC's approach here. Australia's imputation credit system for dividends works quite differently, effectively passing corporate tax paid through to shareholders as a credit against their personal tax bill.

Key Numbers

• 10.75% / 35.75% / 39.35% — 2026/27 dividend tax rates (basic/higher/additional)
• £500 — tax-free dividend allowance
• £12,570 — personal allowance for 2026/27
• 19% / 25% — corporation tax rates below £50,000 and above £250,000 profit

Sources

• Merranti Accounting: Salary vs Dividends in 2026/27
• 1st Formations: Most tax-efficient director's salary and dividends for 2026-27
• Quality Company Formations: Company director tax guide 2026/27

Educational content only — not financial advice.