Ask ten company directors how they pay themselves and you'll probably get ten slightly different answers. Most of them started with a rule of thumb ("small salary, rest in dividends") and never looked back. That's a sensible starting point, but this tax year has moved the goalposts, so it's worth taking a fresh look.
Here's how we think about it.
Two ways to take money out
Your company can reward you in two main ways, and they behave very differently:
Salary counts as a business cost, so it lowers the company's Corporation Tax bill. In return, it's subject to Income Tax and National Insurance (NIC).
Dividends come out of profit that has already had Corporation Tax taken off. There's no NIC to pay, and the personal tax rates are gentler than those on salary.
That difference in treatment is why the classic mix of a modest salary and the rest as dividends has been so popular for so long.
What's new for 2026/27
The headline change is that dividend tax went up. From April 2026, the basic and higher dividend rates rose to 10.75% and 35.75%, while the additional rate stays at 39.35%. The tax-free dividend allowance is still just £500, so nearly every pound you draw is taxable.
Add in the fact that the Personal Allowance (£12,570) and the income tax bands are frozen, and you can see why more directors are edging into the higher-rate band as their profits grow. None of this makes dividends a bad idea. It just means the sums deserve another look.
Finding the right salary
Two figures come up again and again:
£5,000. Employer NIC of 15% kicks in on salary above roughly £5,000. Paying exactly this much gives you a Corporation Tax deduction without triggering employer NIC.
£12,570. This uses your whole Personal Allowance and matches the point where employee NIC starts, so you pay no Income Tax or employee NIC on it. Your company will owe some employer NIC on the slice above £5,000, but the Corporation Tax saving on that extra salary claws most of it back. One caution: if you're the only employee, the Employment Allowance normally isn't available, so don't build it into your figures.
There's also a longer-term angle that often gets overlooked. A salary below the lower earnings limit (around £6,500) doesn't count as a qualifying year towards your State Pension. If you don't have other earnings or NIC credits, that can matter more than the small tax saving from paying yourself less. It's well worth a quick conversation before you settle on a number.
Why dividends usually still come out ahead
Because dividends carry no NIC, taking extra income this way is generally cheaper than taking extra salary, even at the higher 2026/27 rates. Salary above the thresholds attracts Income Tax and employee NIC for you, plus employer NIC for the company.
A few things to keep in mind, though:
Look at the whole picture. Dividends are paid from taxed profit (Corporation Tax is 19% on smaller profits, rising to 25% on larger ones, with marginal relief in between), so compare the combined company and personal tax, not just your own bill.
You need the profits first. Dividends can only be paid from available retained profits. Pay out more than that and it becomes an illegal dividend, which HMRC treats as a director's loan.
Keep the paperwork tidy. Declare each dividend formally and issue a dividend voucher, even if you're a one-person board.
Other things that can tip the balance
Your wider income. Rental income, a partner's earnings or another job all affect which tax band your dividends land in.
Student loans. Repayments are based on your total income, so it's worth checking how your salary and dividends will each be treated.
Borrowing. Mortgage lenders often like to see a decent, steady income, and a very low salary can work against you.
Pensions. Employer pension contributions are a deductible company expense and can beat both salary and dividends, especially for higher earners.
Timing. With a bit of planning ahead of 5 April, you can sometimes bring forward or defer dividends to make better use of your tax bands.
Putting it into practice
Imagine your company makes £60,000 profit before paying you anything. You could take a £12,570 salary, let the company pay Corporation Tax on what's left, and draw dividends from the balance. Change the salary, add a pension contribution, or factor in other income, and the total tax bill shifts. That's why a one-size-fits-all rule rarely gives the best answer, and why it pays to run the numbers.
We're here to help
If these changes concern you, or you have wider questions about your business, please get in touch. We'll do everything we can to support you.
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