Salary vs Dividends for 2026/27

The Director's Guide to Paying Yourself Tax-Efficiently

If you run a limited company in Derby, Coventry or anywhere in the Midlands, one of the most valuable decisions you can make before April is to revisit how you pay yourself.

From 6 April 2026, dividend tax rates are rising by 2% across the board. That might not sound like much, but if you're drawing £30,000 in dividends a year, it means an extra £600 leaves your pocket. For higher earners, the figure is considerably more.

The good news? With the right salary and dividend split for 2026/27, most limited company directors can still significantly reduce their tax bill compared to taking a pure salary. You just need to make sure your strategy is up to date.

Why the Salary and Dividend Approach Still Works

Most limited company directors take a low salary and top up with dividends. There's a simple reason for this: dividends are not subject to National Insurance. Salary is.

Employer National Insurance currently runs at 15% on earnings above £5,000. Employee National Insurance adds a further 8% between £12,570 and £50,270. Take all your income as salary and you're carrying that full NI burden, the company pays more and so do you.

Dividends don't attract NI. They're taxed at lower rates than equivalent salary income. However, while dividend tax has increased, the gap between salary and dividends remains wide enough that the combined approach is still the most efficient structure for most directors.

What's Changing from April 2026?

The key change to be aware of is the dividend tax rate increase. From 6 April 2026:

Tax Band	Tax Rate 2025 / 2026	Tax Rate 2026 / 2027
Basic Rate (up to £50,270)	8.75%	10.75%
Higher Rate (up to £125,140)	33.75%	35.75%
Additional Rate (£125,140 +)	39.35%	39.35%

The £500 dividend allowance remains in place, meaning the first £500 of dividend income each year is tax-free.

The Optimal Salary for 2026/27

For most directors, the most tax-efficient salary remains £12,570, the personal allowance threshold. Here's why:

• You pay zero income tax on a salary of £12,570

• You pay zero employee National Insurance at this level

• The salary is a deductible expense for the company, reducing your corporation tax bill

• A salary of £12,570 qualifies you for a full year of State Pension credits

The employer National Insurance cost on a £12,570 salary is around £1,136 and this is also tax deductible for the company. The corporation tax saving partially offsets the cost.

After Your Salary, What About Dividends?

Once you've taken your salary up to £12,570, you can draw the rest of your income as dividends from retained profits. After the £500 dividend allowance, dividends are taxed at 10.75% up to the basic rate threshold (total income of £50,270).

This means a director taking a £12,570 salary plus dividends of up to £37,700 stays within the basic rate band, with dividends taxed at just 10.75%, far lower than the equivalent salary income.

Once your total income exceeds £50,270, dividends move into the higher rate band at 35.75%, so careful planning around that threshold is important

Don't Forget, Dividends Must Come From Profits

You can only pay dividends from available retained profits after corporation tax. If your company doesn't have sufficient profit, dividends cannot be paid and paying them without the profits to back them up creates problems with HMRC.

Your accountant should be reviewing your profit position before any dividend is declared and ensuring the correct paperwork, a board minute and dividend voucher is in place each time.

At AccountingBliss, we are Derby and Coventry based accountants working with limited companies and limited company directors across. Salary versus dividend reviews are a standard part of how we look after clients and not an expensive extra. If you would like a review or if you're not sure whether your current accountant is making the most of your tax reliefs get in touch for a

free 30-minute consultation and we'll confirm exactly what you need to do.

Derby Office: 1 Pride Place, Derby, DE24 8QR

Tel: 01332 577 289

Coventry Office: Friars House, Manor House Dr, Coventry, CV1 2TE

Tel: 02475 098 680