Salary vs Dividends 2026:
The Optimal Split for Company Directors

One of the most common questions DKAT receives from company directors is: how should I pay myself in 2026? The salary-plus-dividends structure has long been more tax-efficient than salary alone. However, two rounds of changes — in April 2025 and April 2026 — have narrowed the gap and made it essential to re-model the numbers rather than rely on outdated advice.

This article models the numbers at three profit levels, explains both sets of changes in plain English, and shows why employer pension contributions are now the most powerful tool available to most directors.

The worked examples use standard assumptions (sole director, no Employment Allowance, all profits extracted in the same year). Your optimal structure will differ based on your personal income, company profit level, pension position, Employment Allowance eligibility and family circumstances. Always seek professional advice tailored to your situation before changing your remuneration arrangements.

1 What changed in April 2025?

Three changes took effect on 6 April 2025 that directly affect the salary vs dividends calculation:

Together these mean that paying a salary above £5,000 now costs more in employer NIC than it did before April 2025, even after the higher Employment Allowance — which most sole directors cannot claim.

2 April 2026: dividend rates rise again

From 6 April 2026, dividend tax rates increased under Finance Act 2026:

For a basic-rate director taking £30,000 of dividends, the annual dividend tax cost rises by approximately £585 per year. For a higher-rate director taking £50,000 above the basic rate band, the increase is approximately £1,000 per year. These increases narrow, but do not eliminate, the advantage of dividends over salary.

3 The Employment Allowance trap

The Employment Allowance (£10,500) offsets employer NIC pound-for-pound. However, sole directors who are the only employee of their company cannot claim it under Regulation 60 of the Social Security Contributions Regulations 2001. Most owner-managed one-person companies face the full 15% employer NIC rate from the £5,000 threshold with no offset.

The position changes if you employ at least one other genuine employee, including a spouse on payroll at a commercial wage. In that case your company may qualify for the Employment Allowance, materially changing the optimal salary level. Always confirm EA eligibility with your accountant before each tax year.

4 Optimal salary level for sole directors in 2025/26

For a sole director with no EA eligibility, the three main salary levels to consider are:

• £5,000 — just below the secondary threshold; zero employer NIC. However, it does not use the full personal allowance (£12,570), so £7,570 of salary is effectively taxed at the corporation tax rate rather than being extracted tax-free.
• £12,570 — uses the full personal allowance; no income tax or employee NIC on the salary. Triggers £1,136 in employer NIC (£7,570 × 15%). At most profit levels, the income tax saving and CT deduction outweigh the NIC cost.
• £6,500–£8,000 — a compromise. The marginal benefit over £12,570 is generally small once the numbers are modelled.

The worked examples in the next section show how these compare in practice.

5 Worked examples: three profit levels

All three scenarios assume: sole director, no Employment Allowance, no other personal income, all available profit extracted. Rates are post-6 April 2026.

Example A — £40,000 company profit

£12,570 salary + dividends wins by £4,503 per year. Using the full personal allowance and paying corporation tax instead of income tax + employee NIC outweighs the £1,136 employer NIC cost.

Example B — £60,000 company profit

£12,570 salary + dividends wins by £8,984 per year — the largest saving across the three examples. The gap has narrowed since April 2025 but the salary + dividends structure remains clearly superior.

Example C — £100,000 company profit (with employer pension contribution)

Adding a £20,000 employer pension contribution saves an additional £5,863 on top of the salary + dividends saving, bringing the total benefit to £24,286 per year compared with all-salary. At this profit level, the pension contribution is the single most impactful tax lever available.

6 Why employer pension contributions beat everything

An employer pension contribution paid directly from your limited company is the most tax-efficient form of director remuneration available in 2026. Under s.196 Finance Act 2004, the contribution is a fully deductible business expense — reducing taxable profit by the full amount, saving 19–25% corporation tax. Under s.3 Social Security Contributions and Benefits Act 1992, employer pension contributions are excluded from earnings for NIC purposes: no employer NIC at 15%, no employee NIC. And no income tax arises at the point of contribution — the money enters the pension fund before it reaches your personal tax return.

The combined annual allowance is £60,000 for 2025/26. Unused allowances from the previous three tax years can be carried forward, enabling large one-off contributions for directors who have not fully used their allowance in prior years.

7 The £100,000 personal allowance trap

When adjusted net income exceeds £100,000, the personal allowance (£12,570) is withdrawn at £1 for every £2 of excess income under s.35 Income Tax Act 2007, disappearing entirely at £125,140. This creates an effective marginal rate of 60% on salary income and approximately 49% on dividend income in this band.

The most effective mitigation is an employer pension contribution that reduces adjusted net income back below £100,000. A director with adjusted net income of £110,000 who makes a £10,000 employer pension contribution can save over £6,000 in income tax from the restored personal allowance alone, on top of the corporation tax saving.

8 Family company considerations

If your spouse or civil partner is a genuine shareholder, they have their own £12,570 personal allowance, £500 dividend allowance, and access to the 10.75% basic rate dividend band. Structuring shareholdings to enable dividend payments to a lower-earning spouse can reduce the household tax bill considerably.

However, HMRC’s settlements legislation under Chapter 5, Part 5 ITTOIA 2005 can attribute dividend income back to the higher-earning spouse if the arrangement lacks commercial substance, as established in Arctic Systems Ltd v HMRC [2007] UKHL 35. This area carries genuine compliance risk and requires professional advice before implementation. If your spouse is a genuine employee and qualifies your company for the Employment Allowance, the optimal salary calculation changes significantly.

9 Summary: the optimal structure in 2026

For most sole directors in 2026, the recommended structure is: (1) salary of £12,570 to use the full personal allowance; (2) employer pension contributions as far as the annual allowance permits; (3) dividends from remaining profit after corporation tax at 10.75% (basic) or 35.75% (higher). Review the numbers with your accountant every year — the optimal structure for 2026/27 may differ when pension IHT provisions take effect in April 2027.