If you operate through a limited company in the UK, one of the most important financial decisions you make is how to pay yourself.
Most company directors take income using a combination of:
In previous years, dividends were often significantly more tax-efficient than salary.
However, tax changes introduced for the 2026/27 tax year mean business owners now need to review their remuneration strategy more carefully.
Rising dividend tax rates, frozen thresholds, and higher Employer National Insurance rates are changing the balance between salary and dividends.
In this guide, we explain how salary and dividends work, the tax differences in 2026, and how directors can structure income more efficiently.
A salary is employment income paid through PAYE payroll.
When directors take a salary, the company:
Salary is treated as an allowable business expense for Corporation Tax purposes, which means it reduces company taxable profits.
Salary also helps directors maintain qualifying years for the State Pension and may improve mortgage affordability and borrowing applications.
Dividends are payments made to shareholders from company profits after Corporation Tax has been paid.
Unlike salary:
Because dividends avoid National Insurance, they have traditionally been more tax-efficient than taking all income as salary.
The 2026/27 tax year introduced higher dividend tax rates for UK taxpayers.
The current dividend tax rates are:
| Dividend Tax Band | 2026/27 Rate |
|---|---|
| Basic Rate | 10.75% |
| Higher Rate | 35.75% |
| Additional Rate | 39.35% |
The annual dividend allowance remains £500 for 2026/27.
This means dividends are still tax-efficient in many cases, but the gap between salary and dividends has reduced compared to previous years.
For many limited company directors, the most tax-efficient strategy in 2026 is still a combination of:
This approach often allows directors to:
Many advisers still consider a salary around the Personal Allowance threshold combined with dividends to be one of the most efficient approaches for owner-managed businesses. {index=2}
Although every business owner’s situation is different, many directors consider:
This level often allows directors to:
However, Employer National Insurance rules and Employment Allowance eligibility can affect the best approach.
Salary provides several important benefits.
Salary is deductible for Corporation Tax purposes.
This reduces company taxable profits.
Lenders often prefer stable PAYE income when assessing mortgages and loans.
Qualifying salary levels help maintain National Insurance contribution records for State Pension entitlement.
Salary provides predictable monthly income.
Dividends usually remain more tax-efficient than high salary because they do not attract National Insurance.
Dividends can usually be varied depending on company profitability and cash flow.
Many directors use dividends to withdraw surplus profits beyond basic salary requirements.
Many business owners misunderstand dividend rules.
Common mistakes include:
Dividend planning should always consider:
Experts increasingly warn that the traditional “dividends first” approach is no longer always the best solution for every director.
Usually not.
Taking only dividends can create issues including:
For many directors, a balanced salary and dividend strategy remains the best approach.
Taking all income as salary is often less tax-efficient for owner-managed companies because:
High salary strategies are generally more suitable for specific circumstances rather than most small company directors.
Tax is important, but it should not be the only consideration.
Business owners should also consider:
Recent tax changes mean directors should review remuneration planning regularly rather than relying on outdated strategies.
The best salary and dividend structure depends on:
There is no single strategy suitable for every business owner.
Professional tax planning helps directors:
At SV&Co Accountancy, we help business owners structure salary and dividends efficiently while remaining fully compliant with HMRC rules.
Our services include:
We provide proactive advice tailored to your business and personal goals.
If you want professional advice on salary, dividends, tax planning, or limited company accounting, contact SV&Co Accountancy today.
Phone: 07957946562
Email: info.svco@gmail.com
Website: https://www.svco.co.uk