Salary or dividends in 2026/27? For higher-rate directors, it is closer than it was
With dividend tax at 10.75% and 35.75% and employers paying 15% National Insurance, the old rule of thumb needs checking. What a director keeps from each pound of profit.
For years the answer was simple: a small salary, then dividends. It is still often the right answer, but the margin has narrowed. Dividend tax rose by two points in April 2026, to 10.75% for basic-rate and 35.75% for higher-rate taxpayers, and employers have paid 15% National Insurance above £5,000 a year since April 2025.
Salary: 15% employer National Insurance, then 40% income tax and 2% employee National Insurance. Dividends: corporation tax at 19%, 25% or the 26.5% marginal rate, then 35.75% dividend tax. Ignores allowances and the Personal Allowance taper.
Show the data
| As salary | 50.4% |
|---|---|
| Dividend, 19% company | 52% |
| Dividend, 25% company | 48.2% |
| Dividend, marginal band | 47.2% |
Reading the chart
A company paying 19% still makes dividends slightly better for a higher-rate director. Once profits reach the 25% rate, or the 26.5% marginal band, extra salary keeps more. For a basic-rate taxpayer, dividends remain clearly ahead: about 72p of each £1 against roughly 63p as salary.
The usual starting point
A salary up to the £12,570 Personal Allowance still makes sense for most directors: it uses the allowance, builds State Pension entitlement and is deductible for the company. A company whose only employee paid above £5,000 is its sole director cannot claim the Employment Allowance, so employer National Insurance on that salary is a real cost to weigh.
Do not forget the pension
An employer pension contribution is deductible for corporation tax and free of both income tax and National Insurance when it is paid in. Within the £60,000 annual allowance, it keeps the whole pound working for you, to be taxed only when you draw it.
Every director’s position is different: other income, student loans, the Personal Allowance taper above £100,000 and plans for the company all change the answer.
Sources
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This insight is general information, not advice for your circumstances. Talk to us before acting on it.