Many limited company directors pay themselves a combination of salary and dividends to keep their tax bill down. It is a tried and tested approach, and for most owner-managers it still works well.
But dividend tax rates went up on 6 April 2026, so it is worth reviewing whether your current setup still makes sense. This article explains what has changed, what your options are, and how to think about the right mix for your circumstances.
Why Salary and Dividends?
There are two reasons this combination is so popular. Salary is a business expense, so it reduces your company's Corporation Tax bill. Dividends, by contrast, are paid from profits the company has already paid Corporation Tax on, but they are not subject to National Insurance.
That second point is the big one. National Insurance can add up quickly on a normal salary, both for you as the employee and for your company as the employer. Dividends sidestep that entirely.
There is one important rule to remember. Dividends can only legally be paid out of retained profits, meaning profits the company has actually made and kept after tax. You cannot pay dividends from money the company hopes to earn, or from cash that is really owed to HMRC.
What Changed on 6 April 2026?
Dividend tax rates have gone up. The basic rate has risen from 8.75% to 10.75%, and the higher rate has risen from 33.75% to 35.75%. The additional rate stays at 39.35%.
The dividend allowance, which is the amount of dividend income you can receive tax-free each year, remains at just £500. To put that in context, it was £5,000 back in 2017.
Income tax thresholds are also frozen until April 2031. That means as wages and dividends rise with inflation, more people get pulled into higher tax bands without actually being better off in real terms. This effect is sometimes called fiscal drag.
The Three Salary Sweet Spots
Most directors choose one of three salary levels, then take the rest of their income as dividends. Here is how they compare.
Option 1: £5,000 salary
At this level there is no income tax, no employee National Insurance, and no employer National Insurance. It is the simplest option and there is no PAYE to operate if you have no other employees. The drawback is that you do not earn a qualifying year towards the State Pension at this salary level.
Option 2: £6,708 salary (Lower Earnings Limit)
This is the lowest salary that still earns you a qualifying year towards the State Pension. There is no income tax and no employee National Insurance. Employer National Insurance kicks in on the bit above £5,000 (so 15% on £1,708, which works out at about £256 a year for the company). For most single-director companies, this is the sweet spot.
Option 3: £12,570 salary (Personal Allowance)
At this level you use up your full Personal Allowance, so there is still no income tax for you and no employee National Insurance. The company pays employer NI of around £1,135, but it also saves Corporation Tax on the higher salary cost. This option works best when the company can claim the Employment Allowance, which wipes out the employer NI bill.
Important point: most single-director companies cannot claim the Employment Allowance if the director is the only employee paid above the Secondary Threshold. If that sounds like you, the £6,708 salary is often the better choice.
A Worked Example
Let us look at a director who wants to take £50,270 as their total income for the year (right up to the basic rate limit). Here is how the two approaches compare.
Salary plus Dividends approach:
- Salary: £6,708
- Dividends: £43,562
- Income tax: £0
- Employee NI: £0
- Dividend tax (10.75%): £4,629
- Employer NI (paid by company): £256
- Total tax and NI: approx. £4,885
Salary Only approach:
- Salary: £50,270
- Dividends: £0
- Income tax: £7,540
- Employee NI: £3,016
- Dividend tax: £0
- Employer NI (paid by company): £6,790
- Total tax and NI: approx. £17,346
The salary and dividend mix saves around £12,461 in tax and National Insurance compared with taking the same amount as a pure salary. That is a meaningful difference for any owner-manager.
Note that this example focuses on personal tax and the National Insurance the company pays on your salary. Your company will still pay Corporation Tax on its profits, and dividends are paid from those after-tax profits.
Things to Watch Out For
A few practical points worth keeping in mind.
- Dividends must come from real, distributable profits. Paying dividends when the company does not have the profits to support them is unlawful, and HMRC can reclassify these payments as a director's loan or salary.
- Frozen thresholds mean fiscal drag. Even if your income stays the same in cash terms, more of it can tip into a higher tax band over the years.
- If your total income approaches £60,000 and you or your partner claim Child Benefit, the High Income Child Benefit Charge can apply. It is worth modelling the impact before you set your dividend level.
- Pension contributions are a powerful tool alongside dividends. Employer pension contributions reduce your company's Corporation Tax bill and do not count as personal income, so they can be a very tax-efficient way to extract value from the business.
How Ollen Services Can Help
The right mix of salary and dividends depends on your company's profits, whether you have other employees, your personal tax position, your pension plans, and other factors that are unique to you. There is no single answer that fits every director.
At Ollen Services, we look at the full picture and help directors structure their pay in the most efficient way for their circumstances. We explain the options in plain English and make sure you understand the trade-offs.
If you would like a fresh pair of eyes on your director pay for 2026/27, book a free consultation. Call us on 07513 491 259 or email hello@ollenservices.co.uk. No obligation, no pressure, just expert advice tailored to you.