Salary vs dividends in 2026/27

Dividend tax rates have increased for the 2026/27 tax year, further impacting how owner-managed businesses extract profits.

While the change may appear incremental, it raises an important question regarding salary vs dividends:

Is a low salary topped up with dividends still the most tax-efficient way to extract profits?

What’s changed?

From 6 April 2026, dividend tax rates have increased by 2%:

• Basic rate: 10.75%
• Higher rate: 35.75%
• Additional rate: 39.35%

At the same time, income tax thresholds remain frozen until at least 2031. As earnings rise, more income is drawn into higher tax bands through fiscal drag, increasing the overall tax burden.

Alongside this, other recent changes continue to influence profit extraction decisions, including:

• Marginal corporation tax rates between £50,000 and £250,000
• Restrictions on reliefs such as the Employment Allowance for single director companies

Why this matters

The combination of higher dividend tax rates and frozen thresholds means that extracting profits has become progressively more expensive.

For many business owners, the difference between taking income as salary or dividends is now narrower than in previous years.

However, the structure of taxation still creates a clear distinction:

• Salaries are subject to income tax and National Insurance Contributions (NICs)
• Dividends are taxed at lower rates and are not subject to NICs

This means that even with increased dividend tax rates, dividends typically remain more efficient overall. This remains especially beneficial when looking to keep personal income levels below £100,000 per annum to preserve the tax-free personal allowance.

A practical comparison

The following example illustrates how different extraction strategies compare under 2026/27 tax rules.

Amy is the sole director and shareholder of ABC Ltd, generating £200,000 of profit before remuneration. In each scenario, the same level of profit is retained within the business, and no Employment Allowance is available

2026/27

In practical terms, the traditional approach of a low salary topped up with dividends continues to produce a more efficient outcome.

What should business owners be thinking about now?

While the underlying principles remain unchanged, the reduced margin of benefit makes forward planning more important.

Key considerations include:

• Setting salary at an appropriate level to utilise personal allowances (as is typically with owner managed business it is assumed the director does not have an employment contract or performs duties beyond their statutory roles, such that the national minimum wage requirements are not applicable)
• Maximising dividend efficiency within available tax bands
• Considering the interaction with corporation tax rates and Research & Development tax reliefs
• Reviewing wider planning opportunities, including pension contributions and profit retention

A structured, annual review can ensure profit extraction remains aligned with both tax efficiency and commercial objectives.

Get in touch

Dividend tax rates are now higher and, combined with frozen thresholds, the cost of extracting profits continues to increase.

While a low salary and dividends approach remains effective in many cases, the advantage is reducing and requires more careful planning.

If you would like to review your current remuneration strategy or understand how these changes affect your position, speak to your usual PM+M adviser or contact our tax team today.