Salary vs dividends 2026/27: what company directors need to know

For most limited company directors, the salary vs dividends question has had a fairly settled answer for years. Take a modest salary, extract the rest as dividends, repeat. It has worked because dividends are taxed more lightly than income from employment – no National Insurance on either side and lower headline rates.

That logic has not collapsed, but it has taken a knock. From 6th April 2026, dividend tax rates have risen by 2 percentage points for basic and higher rate taxpayers, on top of thresholds that have been frozen since 2021. The gap has narrowed. Therefore, it is worth running the numbers again to get a clearer picture of salary vs dividends 2026/27.

What has changed on the dividend side

From 6th April 2026, the new rates for tax on dividends are as follows:

• Basic Rate – 10.75% (up from 8.75%)
• Higher Rate – 35.75% (up from 33.75%)
• Additional Rate – 39.35% (unchanged)

The tax-free dividend allowance stays at £500. This is a long way from the £5,000 directors could rely on a decade ago. Above that first £500, the new rates apply in full.

The rate rises alone would be manageable. However, what makes 2026/27 more uncomfortable is the compounding effect. The Personal Allowance (£12,570) and the higher rate threshold (£50,270) are both frozen until 5th April 2031.

Because these thresholds aren’t changing, a director whose income has grown with their business is paying more tax year on year. This applies even if they change nothing about how they structure their pay.

Changes to the salary side

The National Insurance rates for 2026/27 remain unchanged from the previous year. However, it’s worth reminding you of the key figures.

• Lower Earnings Limit: £6,708. This is the minimum salary to secure a State Pension qualifying year without paying any NI
• Secondary Threshold: £5,000. This is the point at which Employer NI at 15% kicks in
• Primary Threshold: £12,570. This is where Employee NI at 8% begins

The Secondary Threshold has remained at £5,000 since April 2025, down from £9,100 the year before. It will be frozen until 2031.

For directors setting their salary, this is the number that matters most: anything above £5,000 costs the company 15% in Employer NI before a penny reaches the director. The Lower Earnings Limit, meanwhile, is the floor that keeps State Pension entitlement intact at minimal tax cost. This is a sensible starting point when considering the question of salary vs dividends in 2026/27.

Why dividends still win – but less comfortably

The case for dividends has not disappeared. Salary carries a combined NI burden of 23% (15% employers’ NI, 8% employees’ NI) on earnings above the relevant thresholds. Dividends carry none. Even at the new rates, the arithmetic still tends to favour dividend extraction for most directors – particularly those in the basic rate band.

The Corporation Tax dimension is also real, but it is often overstated. Salary reduces the company’s taxable profits, saving 19–25% in Corporation Tax. Dividends come from after-tax profits and save nothing at the company level. They also have to be paid from available retained profits, so the right approach depends not just on tax rates but on how much profit the company has actually built up. Even so, that saving rarely offsets what you would lose to NI on the salary. The numbers still favour dividends for most, and the 2% rate rise does not change the direction of travel – only the margin.

To put a figure on it: a basic rate taxpayer receiving £30,000 in dividends above the £500 allowance pays roughly £590 more under the new rates than last year. That is not trivial, but it is not a reason to abandon the model.

Getting the salary vs dividends 2026/27 mix right

In a nutshell, the nuance lies in what salary to set before reaching for dividends

For companies that cannot claim the Employment Allowance – including many single-director companies where the director is the only employee paid above the Secondary Threshold – a salary around the Lower Earnings Limit (£6,708) is still a common default. This means their State Pension entitlement is preserved, no NI is triggered, and the rest comes out as dividends.

For companies that can claim the Employment Allowance, the calculation is different. The allowance, which is now £10,500, offsets Employer NI. With that in place, a salary up to the Primary Threshold (£12,570) becomes more attractive: it reduces the company’s Corporation Tax bill without the Employer NI cost eating into the benefit. In those cases, a higher salary and correspondingly lower dividend draw can make sense.

Scottish directors should factor in that their higher rate band starts at £43,663 rather than £50,270, with a rate of 42%. That changes where the salary vs dividends 2026/27 tipping point falls for them – dividend extraction may become preferable at a lower income level than for a director based in England or Wales. Dividend tax rates themselves are the same across the UK.

Salary vs Dividends 2026/27 reference table

Time to review?

The salary-plus-dividends approach remains sound, but 2026/27 is not the year to leave it on autopilot. Higher dividend rates, frozen thresholds and the Employment Allowance question all interact differently depending on your company’s size, structure and your own income level.

THP works with owner-managed businesses to build remuneration strategies that reflect their actual circumstances. If you’d like to talk through the right salary vs dividends split for 2026/27, get in touch with our tax planning team today. We’d be delighted to help you.