If you run a limited company, one of the most important decisions each year is how you pay yourself. The classic approach has always been a small salary plus dividends—but with changes coming into the 2026/27 tax year, is this still the best strategy?

Let’s break it down clearly.

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What’s Changing in 2026/27?

From April 2026, dividend tax rates are increasing:

• Basic rate: 10.75%
• Higher rate: 35.75%
• Additional rate: 39.35% (Remains unchanged)

This means dividends are becoming more expensive, especially for directors already in the higher rate band.

At the same time, corporation tax remains up to 25%, meaning the overall tax burden on company profits + dividends is higher than it used to be.

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Why the Small Salary + Dividends Strategy Still Works

Despite the changes, this structure is still widely used—and for good reason.

1. Tax efficiency

A small salary (typically around the National Insurance threshold) allows you to:

• Use your personal allowance
• Avoid or minimise National Insurance
• Qualify for state pension credits

The rest is taken as dividends, which are still taxed lower than salary (even after the increase).

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2. Corporation tax relief

Salary is a business expense, so:

• It reduces your company’s profit
• This means less corporation tax to pay

Dividends, on the other hand, are paid from post-tax profits.

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3. Flexibility

Dividends give you control:

• Take income when needed
• Adjust based on company performance
• Manage your tax bands more efficiently

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When This Strategy May Not Be Optimal

The gap between salary and dividends is narrowing, so it’s not always the best approach.

Higher rate taxpayers

If your income pushes into the higher rate band, dividend tax at 35.75% significantly reduces the benefit.

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Low-profit companies

If profits are small, the admin and tax savings may not justify dividend planning.

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Pension planning opportunities

In some cases, increasing salary or using employer pension contributions can be more tax efficient than dividends.

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Example (2026/27)

A typical structure might look like:

• Salary: £12,570 per year
• Dividends: Remaining profits

This allows you to:

• Use your personal allowance efficiently
• Keep National Insurance low
• Extract profits in a relatively tax-efficient way

However, if your total income exceeds the basic rate band, more detailed planning is needed.

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Key Takeaway

Yes—small salary plus dividends is still tax efficient in 2026/27, but the advantage is smaller than before.

The best approach now depends on:

• Your total income
• Company profits
• Other income sources
• Long-term planning (e.g. pensions)

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Final Thought

There is no longer a “one-size-fits-all” strategy.

With rising dividend tax rates and tighter rules, directors should review their remuneration annually to ensure they are still being tax efficient.

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Need Advice?

At Taxes Done Right, we help directors structure their income in the most tax-efficient way—based on real numbers, not generic advice.

📞 Call: 0161 710 1901
📧 Email: Tax@TaxesDoneRight.co.uk
Dm Us:
www.taxesdoneright.co.uk