Blog · Company directors
Salary, dividends and pensions after the April 2026 changes, with worked numbers and the traps to avoid. An eight-minute read.
By Umang · Updated August 2026 · ← All guides
TLDR: Take a small salary, top up with dividends to the basic-rate ceiling, and push profit you do not need into a pension. The rules changed in April 2026, so last year's split is probably no longer the right one.
If you run a limited company, one of the most important financial decisions you make each year is how you pay yourself. Get the mix right and you legitimately keep thousands more. Leave last year's arrangement untouched and you hand HMRC money you never needed to.
The 2026/27 year makes this review matter more than usual. From 6 April 2026 dividend tax rates rose by two percentage points, the charge on overdrawn director's loans went up, and the capital gains rate on eventual business sales rose again. The classic structure still works, but the margins are tighter and the traps cost more.
Salary is paid before Corporation Tax, so it reduces the company's taxable profit, but it attracts income tax and National Insurance past the thresholds. Dividends come out of profit after Corporation Tax, carry no National Insurance, and are taxed at lower personal rates. The art is combining them so the total tax across company and person together is as low as possible.
For 2026/27 the personal allowance is £12,570, employee NIC starts at £12,570, and employer NIC runs at 15% above just £5,000. The Employment Allowance can wipe out employer NIC, but a company whose only employee is a single director cannot claim it.
For a sole-director company, £12,570 is still usually optimal. The company pays £1,135.50 of employer NIC, but the Corporation Tax relief on the salary and that NIC recovers more than it costs, leaving you around £400 better off than a lower £6,708 salary. Some directors prefer £6,708 to minimise NIC while still banking a State Pension qualifying year. If you have two or more employees and can claim the Employment Allowance, £12,570 is the clear winner.
Dividend rates for 2026/27 are 10.75% basic, 35.75% higher and 39.35% additional, with a £500 allowance. Dividends stack on top of other income, so a £12,570 salary leaves roughly £37,700 of dividend headroom before the £50,270 higher-rate line.
Worked through: £12,570 salary plus £37,700 dividends is £50,270 of income. The first £500 of dividends is tax-free, the remaining £37,200 at 10.75% costs about £3,999. No income tax or NIC on the salary. That is an effective personal rate under 8%, which is why this structure endures even after April's rises.
Whether the company can pay £37,700 depends on distributable profit after Corporation Tax, which now runs 19% up to £50,000, 25% above £250,000, and an effective 26.5% between. The higher your CT rate, the more a salary deduction is worth relative to a dividend.
Employer pension contributions. Often the single most efficient move. Deductible for the company, no NIC, not taxed on you within the £60,000 annual allowance. For profit you do not need as cash today, this beats both salary and dividends comfortably.
Spouse shareholdings. A spouse who genuinely owns shares has their own allowances and basic-rate band. It must be a real, outright interest, because HMRC's settlements rules attack arrangements that are only income diversion.
Timing. You choose when dividends are declared. Spreading across tax years, or deferring into a lower-income year, keeps more in the basic band.
Retention. You do not have to extract everything. Leaving profit in the company defers personal tax and protects the £100,000 point where the personal allowance starts to taper.
Overdrawn director's loan. Draw more than you are owed and fail to repay within nine months of year end and the company pays a 35.75% section 455 charge. Refundable eventually, painful meanwhile.
Illegal dividends. Dividends can only be paid from distributable reserves. Pay one without the profits there and it gets reclassified, usually as a loan.
IR35. If you contract through your company, confirm your status before building a dividend strategy on that income.
The exit. On winding up, retained profit can often be taken as capital under Business Asset Disposal Relief at 18% for 2026/27, but the anti-avoidance rule catches you if you restart a similar trade within two years.
For most owner-managed companies it remains a low salary, typically £12,570, or £6,708 for a sole director keen to minimise employer NIC, topped up with dividends, and often employer pension contributions for profit you do not need immediately.
On a £12,570 salary you can draw roughly £37,700 in dividends before crossing the £50,270 higher-rate threshold, keeping those dividends in the 10.75% basic-rate band.
Yes, for most directors. Even at 10.75% and 35.75%, dividends carry no National Insurance, so the combined salary and dividend approach still beats a pure salary in most cases. The advantage has narrowed, which is why an annual review matters.
No. Dividends do not attract National Insurance, which is a large part of why they are more efficient than salary above the NI thresholds.
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