Limited Companies
Dividends vs salary: how UK directors should pay themselves now
Most director-shareholders still pay themselves a small salary plus dividends — but the maths changed in April 2026, and the gap between doing it well and doing it lazily is now wider. Dividend tax rates rose by 2 percentage points at the Autumn 2025 Budget: dividends above the £500 allowance are now taxed at 10.75% in the basic-rate band and 35.75% in the higher-rate band. Here's how to think about the split now.
Why the salary-plus-dividends structure exists
Salary is a deductible cost for your company but attracts income tax and National Insurance. Dividends come out of profits after corporation tax, but carry no NI and lower personal rates. The classic structure — a salary around the £12,570 personal allowance, with the rest as dividends — keeps your NI record alive for the state pension, uses your tax-free allowance, and takes the remaining profit at dividend rates rather than income tax rates.
What changed in April 2026
Two pressures have squeezed the dividend advantage. Dividend rates rose 2 points (the additional rate stayed at 39.35%), and employer National Insurance had already become more expensive — 15%, with the threshold down at £5,000. For every £1,000 of dividends above the allowance, a basic-rate director now pays £107.50 rather than £87.50. Small numbers per thousand — but on a £40,000 dividend that's an £800-a-year difference versus the old rates.
So what's the right answer now?
It genuinely depends on profit level, and this is where generic internet advice ages badly. At modest profits, the structures are closer than they've ever been, and for some fully-extracting directors a company is no longer automatically ahead of sole-trader status once you count every layer — corporation tax, then dividend tax, then the admin. At higher profits, or where you can afford to leave money in the company in good years, the limited company still wins on flexibility and timing. And if the company employs someone besides you, the Employment Allowance can change the picture again.
The habits that actually save tax
Take the split seriously once a year rather than setting it in 2019 and forgetting it. Declare dividends properly — board minutes and vouchers, only from available profits (an unlawful dividend is an expensive mess to unwind). Consider pension contributions from the company, which remain one of the most efficient extractions available. And if your income is drifting past £100,000, plan for the personal allowance taper before it happens, not after.
The honest bottom line
There is no universal right split any more — there's a right split for your numbers, this year. We model salary, dividends, pension and retained profit for directors across Leeds every year, and the review typically takes half an hour. If yours hasn't been looked at since the April changes, that's worth fixing before the next dividend is declared.
This is general information, not advice for your circumstances. If you'd like it applied to your situation, get in touch — the first chat is free.
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