For two decades, the standard advice for owner-managed limited companies has been to take a small salary up to the National Insurance threshold and extract the rest as dividends. The maths used to be straightforward. In 2026, every variable has moved — and the optimal mix is no longer one-size-fits-all.
The numbers that matter in 2026/27
- Personal allowance: £12,570 (frozen).
- Basic rate band: up to £50,270 (frozen).
- Higher rate: 40% income tax (33.75% dividends).
- Additional rate: 45% income tax (39.35% dividends) above £125,140.
- Dividend allowance: £500 — down from £2,000 just three years ago.
- Dividend tax rates: 8.75% basic, 33.75% higher, 39.35% additional.
- Employee NIC: 8% (main rate, between £12,570 and £50,270).
- Employer NIC: 15% above the Secondary Threshold of £5,000 (from April 2025).
- Employment Allowance: £10,500 per qualifying employer.
The standard "optimal" salary
For a single-director company where the director is the only employee, the company cannot claim the Employment Allowance. The "optimal" salary in 2026/27 is typically pitched at the Secondary Threshold (£5,000 per year) — keeping employer NIC at zero — or at the personal allowance (£12,570) to maximise corporation tax relief while accepting a small NIC cost. Both options can be defensible; the right one depends on whether you have other income, pension contributions, and what corporation tax band the company sits in.
If the company has at least one other employee earning enough to claim the Employment Allowance, the £10,500 allowance covers far more salary — and pushing the director's salary up to £12,570 (or even higher) often becomes more tax-efficient than dividends for that slice.
Why dividends are less attractive than they used to be
Dividends are paid from post-corporation-tax profit. When your company pays 26.5% in marginal relief territory and you pay 33.75% on the dividend, the combined extraction cost is significant. The £500 dividend allowance no longer offers meaningful shelter.
For a higher-rate taxpayer drawing £50,000 of dividends from a company in the marginal relief band, the combined corporation tax plus dividend tax effective rate can exceed 50%. That changes the calculus on whether to extract profits at all — or whether to reinvest, pension-fund, or defer.
The pension lever — more powerful than ever
Employer pension contributions are deductible against corporation tax, suffer no NIC, and do not count toward the director's taxable income (subject to the annual allowance, which is £60,000 for most people). For owner-managed companies, redirecting profit through an employer pension contribution is now consistently the most tax-efficient way to extract value — provided you do not need the cash today.
A £30,000 employer pension contribution in a marginal relief company saves around £7,950 in corporation tax. Compared with extracting the same £30,000 as dividends and paying 33.75% personal tax, the saving is striking. Our tax planning team builds pension funding into every annual review.
What about a higher salary?
In some cases — particularly where employer NIC is covered by the Employment Allowance and the company is at the upper end of marginal relief — pushing the director's salary higher can outperform dividends. Each pound of salary saves the company 26.5p of corporation tax. The combined personal tax and NIC cost (20% + 8% = 28% in the basic band) is broadly comparable to the dividend route on a like-for-like basis, and salary builds pension and state benefit entitlement.
Multiple shareholders — splitting income
If your spouse or civil partner is a genuine shareholder, splitting dividends across both basic-rate bands can shelter substantial sums at lower rates. HMRC's "settlements" anti-avoidance rules apply, so the shares must be ordinary shares with full voting and capital rights — not a special non-voting "income only" class. We review this in every spouse-shareholder structure.
The verdict for 2026
The low-salary / high-dividend formula still works for many owner-managers — but the gap to alternatives (pensions, retained profits, salary with Employment Allowance, R&D claims) has narrowed dramatically. Every owner-managed company should now run a personal extraction review at the start of each tax year rather than copying last year's payroll.
Our payroll service includes a free annual extraction model for limited company directors. Book a 30-minute call and we will show you the exact combined effective rate on your last £10,000 of extraction — and where you can do better.