Salary v dividends in 2026/27

What’s new?

There aren’t many income tax changes for the new tax year. In fact, that’s one of the problems with the tax system; income tax thresholds have been frozen since 2021 and based on current plans won’t be defrosted until 2031. The result is fiscal drag - as you need/earn more income to keep up with inflation, you’re pulled into higher tax brackets.

There is one change that will impact company owner-managers, however, the increase in dividend tax rates. The ordinary and higher rates increase by 2% (from 8.75% and 33.75%) to 10.75% and 35.75% respectively from 6 April 2026. The additional rate remains the same at 39.35%.

Profit extraction

This brings us to the age-old question of tax- efficient profit extraction. Several tax changes in recent years have eroded the tax efficiency of dividends, including the introduction of a sliding scale for corporation tax rates where profits are between £50,000 and £250,000. The increase in the employment allowance to £10,500 also makes salaries more attractive in some cases, but it isn’t available to single director/employee companies.

If you’re the sole director/employee, a low salary plus dividends remains the gold standard for profit extraction.

Doing the sums

We’ve put the tip to the test. The example below illustrates the consequences across a sample range of salaries and dividends.

Example.  Amy is the sole director and shareholder of Acom Ltd. Based on current performance she assumes Acom will make profits of £200,000 per year before she takes either salary or dividends. To make the sums comparable, in each case the same amount of income is left in the company to accumulate. The figures show the advantage of taking low salary and higher dividends.

2026/27

Granted, the savings aren’t huge, but when the tax system is constantly being tinkered with to squeeze as much out of you as possible, you have to take the savings where you can.

Circumstances

The examples show that for “one man bands” a low salary topped up with dividends leaves the owner-manager with more net income compared to higher salaries. However, there is a wide range of profit extraction methods available, see  Further information .

What works best for one owner-manager won’t work for another, so whilst in principle low salary topped up with dividends is tax efficient, you should build a strategy each year based on your and your company’s circumstances.