With dividend tax rates rising in April 2026, the calculation has shifted. Here's exactly how to structure your income for maximum take-home pay in 2026/27.
If you run your own limited company, how you pay yourself matters enormously to your overall tax bill. Most directors take a combination of a small salary and dividends — a strategy that's been standard practice for decades because it significantly reduces the amount of tax and National Insurance paid compared to a pure salary.
But the rules have shifted in 2026/27. Dividend tax rates increased by 2% from April 2026, and it's worth revisiting whether the strategy still makes sense and how to optimise it for the current tax year.
The fundamental reason is National Insurance. When you pay yourself a salary, both you and your company pay National Insurance contributions. But dividends don't attract National Insurance at all. This creates a significant tax advantage — particularly for basic rate taxpayers.
The other reason is corporation tax. When your company pays you a salary, it's a deductible business expense that reduces the company's corporation tax bill. Dividends are paid from post-tax profits. This means the total tax take (corporation tax plus personal tax) needs to be compared holistically rather than just looking at personal tax rates.
Companies with profits up to £50,000 pay 19% corporation tax. Companies with profits above £250,000 pay 25%. Between £50,000 and £250,000, marginal relief applies — the effective rate rises gradually from 19% to 25%.
| Band | Income | Tax rate | NI rate (employee) | Total cost |
|---|---|---|---|---|
| Personal allowance | £0–£12,570 | 0% | 0% | 0% |
| Basic rate | £12,571–£50,270 | 20% | 8% | 28% |
| Higher rate | £50,271–£125,140 | 40% | 2% | 42% |
| Dividend band | 2025/26 rate | 2026/27 rate | Change |
|---|---|---|---|
| Dividend allowance | £500 — 0% | £500 — 0% | No change |
| Basic rate | 8.75% | 10.75% | +2% |
| Higher rate | 33.75% | 35.75% | +2% |
| Additional rate | 39.35% | 39.35% | No change |
The question of what salary to pay yourself as a director comes down to a balance of National Insurance thresholds. There are two main options in 2026/27:
£9,100 is the secondary NI threshold — the point above which employer National Insurance (at 13.8%) kicks in. By keeping your salary at exactly £9,100, neither you nor your company pays any National Insurance on the salary. You're below the primary NI threshold too, so no employee NI either.
However, at £9,100 you're below the personal allowance (£12,570), so you won't have used all of your tax-free income. If you have no other income, the "dead zone" between £9,100 and £12,570 means you'd take some of your income as dividends that could have been tax-free salary.
By paying yourself £12,570 — up to the personal allowance — you use your entire tax-free income as salary. You won't pay income tax on it. But you will pay employer NI of 13.8% on the portion above £9,100 (£3,470 × 13.8% = approximately £479 in employer NI).
However, the employer NI is itself a tax-deductible business expense, and at the small companies rate of 19% corporation tax, this generates a corporation tax saving of about £91. The net cost of the £479 NI is roughly £388.
The question is whether the extra £3,470 of tax-free salary (saving £0 income tax at basic rate since it's within the personal allowance, but saving corporation tax of around £659) justifies the NI cost of £388. For most directors it does — a £12,570 salary is typically slightly better than £9,100.
Director pays themselves £12,570 salary. Company has £37,430 remaining after salary deduction. Corporation tax at 19% = £7,112. Available for dividends: £30,318.
Company profit: £50,000 · Corporation tax rate: 19%
At £100,000 profit, the company enters the marginal relief band (19%–25% effective corporation tax rate). The optimal salary remains £12,570. After salary, £87,430 of profit remains; effective corp tax at approximately 22% = ~£19,235. Available for dividends: ~£68,195.
Company profit: £100,000 · Effective corporation tax rate: ~22%
Calculate your exact dividend tax bill for 2026/27
The most significant change is the 2% rise in basic and higher rate dividend tax, which took effect from April 2026. This was announced in the Autumn Budget 2024 and means:
For a director taking £30,000 in dividends at the basic rate, this means an extra £600 in dividend tax compared to 2025/26. The strategy remains worthwhile, but the advantage over a pure salary route has narrowed somewhat — particularly at higher dividend levels where the higher rate applies.
The dividend allowance remains at £500. This was reduced from £1,000 in April 2024 and has not been restored.
If your company employs others as well as yourself, you may be entitled to the Employment Allowance (£10,500 in 2026/27), which reduces your employer NI bill. This can change the optimal salary level — if you have the Employment Allowance available, paying a salary up to £12,570 has no NI cost at all, making it clearly preferable.
Directors-only companies generally cannot claim the Employment Allowance. If you have at least one other employee, you may be able to claim it.
Dividends can only be paid from retained company profits. You cannot pay a dividend if your company has no distributable reserves. If your company has had losses in previous years, check with your accountant that sufficient retained profit exists before declaring a dividend.
If you have shareholders other than yourself (a spouse, partner or investor), dividends must be paid equally to all shares of the same class. If you want to pay different amounts to different shareholders, you need different share classes — speak to a solicitor about the implications.
Some mortgage lenders and lenders assess director income differently. If you're planning to borrow in the near future, check whether your lender counts dividends as income and how they assess it. Some require two or three years of accounts.