Every UK limited company director faces the same question every spring. How much salary, how much dividend, and where is the sweet spot for the new tax year? The answer changes with every Budget, and 2026 is no exception. The rules-of-thumb that worked five years ago are now leaving directors several thousand pounds worse off than they need to be. Here is what the maths actually looks like right now.
Quick Refresher: How Each One Is Taxed
Salary goes through PAYE and attracts income tax at 20%, 40% or 45% above your personal allowance, plus employee and employer National Insurance. Dividends come out of post-tax company profit and are taxed at 10.75%, 35.75% or 39.35% above the £500 dividend allowance, with no NI on top. The basic and higher dividend rates each went up two percentage points from 6 April 2026 (previously 8.75% and 33.75%). The trade-off is between a deduction in the company and a higher charge on you personally (salary), versus no company deduction but lower personal rates (dividends). The dividend route still wins for most director-shareholders, but the gap is now narrower than it was. The optimal mix depends on your bracket, your spouse’s income, and what you do with the rest of the profit.
The 2026 Salary Sweet Spot
For most single-director limited companies the most tax-efficient salary sits at the Secondary Threshold for employer NI of £5,000 a year. Push higher and the employer NI charge of 15% on the bit above £5,000 starts eating the saving. The Employment Allowance, which used to soak up that NI, is not available to companies with a single director who is also the sole employee. Some directors still go to £12,570 to use the full personal allowance and protect their state pension qualifying year, accepting the small NI hit on the bit above £5,000. The right answer for you depends on whether you have other PAYE income and how the £100,000 taper interacts with your dividend plan.
When Dividends Start Beating Salary
Once your salary has used your personal allowance, every additional pound is more efficient as a dividend than as further salary. The dividend allowance for 2026/27 is £500. After that, dividend tax kicks in at 10.75% basic, 35.75% higher and 39.35% additional. Even at 10.75%, the combined personal and corporate tax cost on dividends still comes in lower than the equivalent salary cost once you factor in employer and employee NI. The advantage is smaller than it was before the April 2026 rate increase, but it remains the right call for most directors.
Pension Contributions: The Underused Lever
Employer pension contributions paid by your limited company are a deductible expense. No employer NI on the way out, no personal tax on the way in. For directors in the higher or additional rate band, redirecting profit into a pension instead of taking it as a dividend produces significant tax savings once you stack the corporation tax deduction on top of the avoided dividend tax. The annual allowance is £60,000, with up to three years of carry-forward if you have not used previous allowances. Most directors we work with leave this one on the table.
The £100,000 Trap Nobody Plans For
Once total income approaches £100,000, every pound between £100,000 and £125,140 is taxed at an effective 60% because your personal allowance tapers away. Directors heading toward this band should be using pension contributions, Gift Aid or salary sacrifice to keep total income under £100,000 where they can. Taking dividends that drag you straight through this zone is the single most common mistake we see high-earning directors make.
Speak to a Business Strategy Accountant Today
The right split for you depends on company profit, other income, pension contributions, student loans, and whether you have a spouse with unused tax bands. There is no single answer that works for everyone. A specialist limited company accountant runs the calculation with your actual numbers and reviews it every spring as rates change.
