If you own and run a limited company, you decide how the money reaches you. The two main routes are taxed completely differently, and the balance between them shifted this April.
What changed in April 2026
The ordinary dividend rate rose from 8.75% to 10.75%, and the upper rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. The dividend allowance remains £500.
Dividends are still the more efficient route in most cases — but by less than before, and there is now a band of profit where the answer flips.
Why the two routes differ
Salary is a company expense. It reduces the profit subject to corporation tax. But it attracts income tax and employee National Insurance in your hands, and employer National Insurance at 15% on anything above the £5,000 secondary threshold on the company's.
Dividends are paid from profit after corporation tax, so no relief for the company. But there is no National Insurance on either side, and the dividend tax rates are lower than income tax rates.
The arithmetic, on £100 of profit
Take £100 of company profit before any salary and follow it all the way through to your bank account. The answer depends on your corporation tax rate and your personal tax band.
| Corporation tax rate | Via dividends | Via salary |
|---|---|---|
| 19% — basic rate taxpayer | £72.26 | £62.61 |
| 19% — higher rate taxpayer | £52.04 | £50.43 |
| 26.5% marginal — basic rate | £65.60 | £62.61 |
| 26.5% marginal — higher rate | £47.22 | £50.43 |
| 25% — basic rate | £66.94 | £62.61 |
| 25% — higher rate | £48.19 | £50.43 |
Read the fourth row again. If your company profits sit between £50,000 and £250,000 — where marginal relief produces an effective corporation tax rate of 26.5% — and you are a higher-rate taxpayer, additional salary now beats additional dividends. That was not true before April 2026.
A company whose only employee is a single director generally cannot claim the £10,500 Employment Allowance. If you do have other employees and can claim it, the employer NI cost disappears and salary becomes considerably more competitive — enough to win outright at higher rate.
The optimal director's salary
For a single-director company with no Employment Allowance, the usual choice is between two levels:
- £5,000 — the employer NI secondary threshold, so no National Insurance of any kind
- £12,570 — the full personal allowance, which triggers employer NI on the excess over £5,000
The higher salary costs £1,135.50 in employer NI. It is still usually the better answer, because both the extra salary and that employer NI reduce the profit chargeable to corporation tax.
Worked example
Company profit before salary of £50,000, corporation tax at 19%, all remaining profit taken as dividends:
| £5,000 salary | £12,570 salary | |
|---|---|---|
| Employer NI | £0 | £1,135.50 |
| Profit chargeable to CT | £45,000 | £36,294.50 |
| Corporation tax at 19% | £8,550 | £6,895.96 |
| Dividends available | £36,450 | £29,398.54 |
| Dividend tax | £3,050.85 | £3,106.59 |
| You keep | £38,399 | £38,862 |
The £12,570 salary comes out roughly £460 ahead. The gap is not enormous, but it is free, and it repeats every year.
The reason not to go too low
A salary below the lower earnings limit does not earn you a qualifying year towards the State Pension. Saving a few hundred pounds of employer NI while quietly losing a qualifying year is a poor trade — you need 35 qualifying years for the full new State Pension, and buying missing years back later costs considerably more than you saved.
This is the most common mistake we see in companies set up without advice: a salary set at £1,000 a month because it seemed like a round number, with nobody checking what it did to the director's National Insurance record.
Rules that apply to dividends
Dividends are not simply money you move out of the company. To be valid they must be paid from distributable retained profits — profit after corporation tax, accumulated across all years.
If you take more than that, it is not a dividend. It is a director's loan, and if it is still outstanding nine months and one day after your year-end, the company pays a section 455 charge on it. That charge is refundable once the loan is repaid, but it ties up cash for a long time and is entirely avoidable.
- Check retained profit before declaring anything
- Minute the declaration and issue a dividend voucher for each payment
- Pay dividends in proportion to shareholdings, unless you have set up alphabet shares deliberately
- Keep the paperwork — HMRC does ask for it
What this analysis leaves out
Plenty, and any of it can change the answer:
- Employer pension contributions — usually deductible for corporation tax, free of both employee and employer NI, and often the single most efficient way to extract value from a company
- Other income — a salary elsewhere, rental profits or investment income all use up your bands first
- The £100,000 taper — between £100,000 and £125,140 the personal allowance withdraws at £1 for every £2, creating a 60% effective marginal rate
- Mortgage applications — some lenders assess a director's income on salary alone, which makes a very low salary awkward at exactly the wrong moment
- Statutory pay — maternity and sick pay entitlements are calculated on salary, not dividends
Our salary versus dividends calculator lets you set a profit figure and a salary level and see what actually reaches you, including marginal relief on corporation tax.
Figures are for the 2026/27 tax year, England, Wales and Northern Ireland. This is general information, not advice for your circumstances. Your optimal split depends on your full financial position — book a call and we will work it out properly.