If you’re a company director, how you pay yourself isn’t just admin — it’s one of the biggest drivers of your personal tax position. For years, the strategy was simple: low salary, high dividends. But with dividend tax rates increasing from April 2026, that approach isn’t as clear-cut anymore.
So the real question now is:
- What’s the most tax-efficient way to pay yourself going forward?
As a director of a limited company, you typically extract income in two ways — salary (through PAYE) or dividends (from company profits after tax). Most directors use a combination of both. The key isn’t choosing one over the other — it’s getting the balance right.
Salary is treated as earned income. It goes through PAYE and is subject to income tax, employee National Insurance, and employer National Insurance. At first glance, that makes salary look expensive.
But it comes with important advantages. Salary is a deductible expense for the company, which reduces corporation tax. It also counts as qualifying income for mortgages, pensions, and certain state benefits.
So while it’s more heavily taxed on the surface, it still plays an important role in your overall strategy.
Dividends are paid from company profits after corporation tax. They’re not subject to National Insurance, which is why they’ve historically been more tax-efficient.
However, they are subject to dividend tax — and from April 2026, those rates are increasing. The tax-free dividend allowance is now just £500, with anything above that taxed based on your income band.
The gap between salary and dividends is shrinking.
This is where things have changed. Dividend tax rates are higher, the allowance is minimal, and tax bands are frozen. This means more directors are unintentionally drifting into higher tax brackets and paying more tax than expected.
At the same time, salary hasn’t changed significantly — so the comparison between the two is tightening. This doesn’t mean switching fully to salary. It means the optimal mix now depends entirely on your specific numbers — not a generic rule.
Let’s bring this to life with a practical example.
Assume your company generates £100,000 in profit before paying you. A common approach is to take a salary at the personal allowance level of £12,570, keeping income tax to a minimum while still maintaining qualifying income.
This reduces the company’s taxable profit to £87,430. At a corporation tax rate of 25%, the company pays around £21,857 in tax, leaving approximately £65,573 available for dividends.
You then receive total income of £78,143 — made up of your salary and dividends.
After applying the £500 dividend allowance, the remaining dividends are taxed across the basic and higher rate bands at the new 2026 rates of 10.75% and 35.75%.
This results in a personal dividend tax bill of roughly £12,000. So, from the original £100,000 company profit, after corporation tax and personal tax, you’re left with around £66,000 in your pocket.
Now let’s flip it.
If instead you took a £50,000 salary and reduced dividends, you’d pay income tax at 20% and 40%, along with employee National Insurance. The company would also incur employer National Insurance.
Yes, corporation tax would reduce further — but the combined tax cost is typically higher. In most scenarios at this income level, you’d end up with a few thousand pounds less in your pocket compared to the low salary, high dividend approach.
Even with the dividend tax increases in 2026, the classic structure still generally works:
- Keep salary low (around the personal allowance)
- Take the remainder as dividends
But — and this is important — the margin is smaller than it used to be. And once you start moving into higher-rate tax territory, dividends become significantly more expensive.
Many directors are still operating on outdated assumptions. Taking dividends without tracking total income properly is a big one. It’s easy to drift into higher-rate tax without realising it until after the year-end.
Another is keeping salary too low without considering the bigger picture, such as mortgage affordability or pension contributions. And probably the biggest issue — assuming last year’s strategy still works this year.
It often doesn’t.
- Start by reviewing your current salary level and making sure it aligns with both tax efficiency and your personal financial goals.
- Project your total income before the year ends so you can manage your position proactively rather than reactively.
- Look at different scenarios. Small changes in how you extract income can lead to meaningful differences in your net position.
- And don’t ignore timing — when you take dividends can have a direct impact on how much tax you pay.
Director remuneration used to be straightforward. Now, it’s a moving target. With dividend tax increasing and thresholds frozen, the difference between good planning and poor planning is growing every year.
- The directors who stay proactive will remain tax-efficient.
- The ones who don’t will quietly pay more than they need to.
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