Salary vs Dividends in 2026/27: How Should Limited Company Directors Pay Themselves Now?

If you run your own limited company, one of the most important decisions you make each year is how to pay yourself. Do you take a salary through PAYE, draw dividends from company profits, or use a mix of both? For most directors, a combination of the two has always been the most tax efficient route. But the rules have shifted again for the 2026/27 tax year, and a structure that worked well last year may not be the right one now.

At R&R Accounting Solutions, we work with small business owners and directors across Blackburn and the wider Lancashire area, and this is one of the questions we get asked most often at the start of a new tax year. Here is what has changed, and how to think about your own salary and dividend split for 2026/27.

Why This Year Is Different

The headline change is straightforward: dividend tax has gone up. From 6 April 2026, the basic rate of dividend tax rose from 8.75% to 10.75%, and the higher rate rose from 33.75% to 35.75%. The additional rate stayed at 39.35%.

On top of that, the tax free dividend allowance for 2026/27 remains just £500. That means almost all dividend income above this small amount is now taxed at the new, higher rates. If you drew dividends last year without reviewing the numbers, you are likely paying more tax on exactly the same income this year, simply because the rates have moved.

This makes it worth revisiting your remuneration strategy properly, rather than assuming last year’s split still applies.

The £12,570 Salary Benchmark, and Why It Is Not Automatic

For many years, the standard advice has been to pay yourself a salary equal to the personal allowance and take the rest as dividends. For 2026/27, that figure is £12,570 a year, or £1,047.50 a month. At this level, you pay no personal income tax and no employee National Insurance on your salary, while still building a qualifying year towards your state pension.

However, this is not automatically the best option for every company. Paying a salary of £12,570 does trigger employer National Insurance, charged at 15% on earnings above the £5,000 secondary threshold. Whether this is worth it depends heavily on whether your company can claim the Employment Allowance, which can offset some or all of that employer NI cost.

Where the Employment Allowance is available, a salary at or near £12,570 is usually the more tax efficient choice, because the corporation tax relief on the salary outweighs the NI cost. Where it is not available, for example in some single director companies with no other employees, the calculation can look different, and a lower salary may work out better.

Recommended action: Check your company’s Employment Allowance eligibility before setting your payroll for the year. This is exactly the kind of detail that gets missed when directors simply copy last year’s approach.

Working Out the Right Dividend Top-Up

Once your salary is set, dividends usually fill the gap up to the higher rate threshold. As an example, if you take a salary of £12,570, you have a further £37,700 of dividend income available before you move into the higher rate band.

At that level, under the new 2026/27 rates, the personal tax on those dividends comes to roughly £3,999. That is around £744 more than the same dividend amount would have cost under last year’s rates. Nothing about your income has changed, but the tax bill has gone up simply because the rates have.

This is a useful number to sit with. It shows clearly why reviewing your figures each year matters, rather than assuming the same split will keep producing the same result.

What This Means in Practice

There is no single “correct” salary and dividend split that applies to every director. The right answer depends on:

Whether your company qualifies for the Employment Allowance
Your total profit available for extraction
Any other personal income you have
Longer term plans, including pension contributions

A structure that suits one director can cost another several hundred pounds a year in unnecessary tax. The only way to know which side of that line you fall on is to run the numbers for your own company, rather than relying on general rules of thumb.

Review Your Split Before the Year Gets Away From You

The frozen personal allowance, the higher dividend tax rates, and the Employment Allowance rules all interact in ways that are easy to miss if you are not looking at them together. An annual review at the start of each tax year is one of the simplest ways to avoid quietly losing money to outdated assumptions.

If you have not looked at your salary and dividend split since April, now is a good time to do it properly, with your actual figures rather than general guidance.

Frequently Asked Questions

What are the dividend tax rates for 2026/27?

For 2026/27 the basic rate of dividend tax is 10.75%, the higher rate is 35.75% and the additional rate remains 39.35%. The tax free dividend allowance stays at £500.

How much salary should a limited company director take in 2026/27?

Many directors take £12,570 a year (£1,047.50 a month), matching the personal allowance, so there is no income tax or employee National Insurance. Whether this is optimal depends on whether your company can claim the Employment Allowance to offset employer NI at 15% above the £5,000 secondary threshold.

How much more dividend tax will I pay in 2026/27?

On a £12,570 salary plus £37,700 of dividends, the dividend tax is roughly £3,999 for 2026/27 — around £744 more than the same income would have cost under the previous rates.

Is it still better to take dividends instead of salary?

Usually a mix is still the most tax efficient, but the gap has narrowed with the higher dividend rates. The right split depends on Employment Allowance eligibility, available profits, your other income and your pension plans, so the numbers should be run for your own company each year.

This article is general guidance for UK businesses and individuals and does not constitute personal financial or tax advice. Rules, thresholds and individual circumstances vary — always confirm your specific position with a qualified accountant before acting.