Dividend vs salary for 2026/27

For owner-directors, how you pay yourself is the single most repeatable tax decision of the year. The classic answer — small salary, dividends above it — still holds in 2026/27, but the margins have narrowed and the details matter more than they used to.

Why the split exists

Salary is a deductible company expense but attracts income tax and employee NI (and employer NI above the secondary threshold). Dividends come from post-corporation-tax profit, but carry no NI and enjoy lower personal rates: 8.75% basic, 33.75% higher, 39.35% additional — after a £500 dividend allowance that has shrunk to almost nothing.

The standard structure: salary at the £12,570 personal allowance (preserving state pension credits, deductible for the company), then dividends. Corporation tax at 19%–25% takes its slice first, which is why the advantage over salary has compressed since the 19%-for-everyone era — but compressed is not gone.

What changes the answer

• Corporation tax band: profits £50k–£250k pay marginal relief rates, changing the arithmetic
• Other income: rental or employment income eats the bands dividends would use
• Pension contributions: company contributions skip NI, corporation tax AND income tax — frequently the best 'extraction' of all
• The £100k trap: dividends pushing total income past £100,000 start destroying the personal allowance (60% effective rate)
• Retained profits: money you don't need to extract can stay in the company — extraction tax is only paid on what you take

Practicalities

Dividends need distributable profits and proper paperwork (board minute, dividend voucher) — 'I transferred money out' is not a dividend, and HMRC treats undocumented drawings badly. Payroll must actually run for the salary, with RTI submissions. Our contractor packages do all of this and re-run the optimisation every April; the £249 remuneration review does it as a one-off for your exact numbers.