If you run a limited company, deciding how to pay yourself can make a significant difference to your take-home income and your company’s tax bill.

A combination of salary and dividends remains worth considering for many director-shareholders. However, higher dividend tax rates in 2026/27 mean it is time to review your figures.

The most tax-efficient mix depends on your company’s profits, your other income and whether your business can claim Employment Allowance. See our blog here on this topic.

Here is how to approach the decision.

What has changed for 2026/27?

The 2026/27 tax year runs from 6 April 2026 to 5 April 2027. The basic and higher dividend tax rates have both increased by two percentage points, while the additional rate remains unchanged.

Dividend tax band	2026/27 rate
Basic rate	10.75%
Higher rate	35.75%
Additional rate	39.35%

The annual dividend allowance remains £500. Dividends covered by any unused Personal Allowance are also tax-free. However, the £500 dividend allowance still uses part of your tax band; it does not extend the basic-rate band.

These changes make reviewing your remuneration worthwhile, even if your business and personal circumstances have stayed the same.

Why the lowest personal tax bill may not give the best result

Salary and dividends affect the company differently.

Salary and related employer National Insurance are generally deductible when calculating taxable company profits, provided the costs meet the relevant rules. Dividends are paid from profits after Corporation Tax and do not qualify as a business expense.

For most trading companies, Corporation Tax is 19% on profits of £50,000 or less and 25% above £250,000, with marginal relief potentially available between those limits. The thresholds can be reduced for associated companies and shorter accounting periods.

This means comparing the dividend tax rate with the salary Income Tax rate alone can give a misleading answer. You need to calculate the total company cost and the amount left in your pocket.

Is a £12,570 salary still worth considering?

For a director with a full Personal Allowance and no other income using it, an annual salary of £12,570 is a useful starting point to assess.

Assuming a full-year directorship and standard National Insurance treatment, that salary normally attracts no employee National Insurance or Income Tax. However, employer National Insurance is generally charged at 15% on salary above £5,000.

That produces an employer National Insurance bill of £1,135.50, before any Employment Allowance is applied.

The employer charge does not automatically make a lower salary better. The Corporation Tax relief on salary and employer National Insurance may still make £12,570 attractive overall.

The right comparison is therefore the combined tax cost of different salary levels, alongside the dividends needed to meet your income target.

How Employment Allowance changes the calculation

Employment Allowance can reduce eligible employers’ National Insurance bills by up to £10,500 in 2026/27. If your company qualifies and has sufficient unused allowance, it could cover the employer National Insurance on your director’s salary.

However, a company with only one director cannot claim where that director is the only employee liable for employer Class 1 National Insurance. Having someone else on the payroll does not automatically establish eligibility.

Before deciding your salary, check both whether the company qualifies and how much allowance its wider payroll will use.

A worked example of salary and dividends

Suppose a director takes:

• A salary of £12,570.
• Dividends of £37,700.
• Total income of £50,270.

Assume they have their full Personal Allowance, no other income, no taxable benefits and no adjustments affecting their tax bands.

The salary uses the Personal Allowance. Of the dividends, £500 falls within the dividend allowance, leaving £37,200 taxed at 10.75%.

The resulting dividend tax is £3,999, leaving personal income after that tax of £46,271.

For the same salary and dividends in 2025/26, dividend tax would have been £3,255. The rate increase therefore adds £744 to the annual personal tax bill. These calculations use HMRC’s published dividend rates and allowance.

This illustrates the personal tax position, rather than proving this is the best mix. The company must also fund the salary, any employer National Insurance and the Corporation Tax due before profits are available for dividends.

Can the company afford the dividends?

Money in the company bank account is not necessarily available to distribute.

Dividends must be supported by sufficient distributable profits, taking account of losses and the company’s tax position. They also need proper approval and records, including dividend vouchers.

Before paying yourself, check current management accounts and leave enough cash for tax, suppliers, payroll and other commitments. A payment that helps your personal finances today should not create a company cash-flow problem next month.

A practical decision guide for directors

Start with how much net income you need from the business. Your accountant can then compare ways of providing that income using the same underlying company profit.

The review should cover:

• Your other income: employment, pensions, rent and investment income can affect the allowances and tax bands available.
• Company profits: the Corporation Tax position influences the benefit of salary deductions.
• Employment Allowance: eligibility and remaining allowance can alter the salary calculation.
• Your National Insurance record: a very low salary may affect whether the year counts towards contribution-based entitlements.
• Timing and cash flow: consider when income is needed and when the company can afford to distribute profits.

If you do not need to withdraw all the profits, retaining some in the business may also be worth assessing. Employer pension contributions can form part of a wider remuneration review, subject to pension allowances, tax rules and your need for accessible income.

Review your mix before carrying it forward

There is no single salary-and-dividend formula that suits every director. A figure recommended to another business owner may produce a different result for you.

At Spicer & Co, we can help you compare the options, understand the combined company and personal tax costs, and plan withdrawals around your business’s cash flow.

Book a free initial consultation with Spicer & Co to review your salary and dividends for 2026/27 and find a mix that works for you.

Figures reflect the rules checked on 1 October 2026. Examples are illustrative; individual circumstances can change the outcome.