02 Jul Dividends vs. Salary: Are You Extracting Profits Efficiently in 2026?
If you’re running your own limited company, you know that the "How much should I pay myself?" question never really goes away. It just evolves every time the Chancellor picks up their red briefcase.
Now that we’re firmly into the 2026/27 tax year, the landscape has shifted again. With the dividend tax hike that kicked in this April and the ongoing freeze on personal allowances, the "old" rules of thumb might be costing you more than you realise.
As a limited company accountant, we’ve seen plenty of directors scratching their heads this year. Is the traditional low-salary, high-dividend model still the winner? Or has the 2026 tax environment tipped the scales? Let’s break it down in plain English.
The 2026 Tax Landscape: What’s Changed?
Are you still using 2024 numbers to plan your 2026 income?
It’s easy to get stuck in a routine, but 2026 has brought some specific hurdles for small business owners. While the Personal Allowance remains frozen at £12,570 (and is expected to stay there until 2031), the cost of taking dividends has crept up.
From 6th April 2026, dividend tax rates increased by 2 percentage points for basic and higher-rate taxpayers. Here is the current reality:
- Dividend Allowance: A slim £500 (tax-free).
- Basic Rate Dividend Tax: 10.75% (was 8.75%).
- Higher Rate Dividend Tax: 35.75% (was 33.75%).
- Additional Rate: 39.35%.
On top of this, National Insurance (NI) changes from the previous year are still biting. Employer NI is currently 15% on any salary above the £5,000 Secondary Threshold. This means that once your company pays you more than £5,000 in salary, the business starts paying an extra 15% on top.
Strategy 1: The Salary "Sweet Spot"
Why bother with a salary at all if the tax is so high?
It’s a fair question. The main reason for taking a salary is to use up your Personal Allowance (£12,570) and ensure you’re qualifying for the State Pension.
In 2026, most directors still aim for a salary of £12,570. Here’s why:
- Tax-Free: It uses your full Personal Allowance, so you pay 0% Income Tax on this amount.
- NI Credits: It’s above the Lower Earnings Limit (£6,708), meaning you get a qualifying year for your State Pension without actually having to pay Employee NI.
- Corporation Tax Relief: The salary (and the Employer NI paid on it) is a business expense, reducing the profit your company is taxed on.
The Catch: Because the Employer NI threshold is only £5,000, paying yourself £12,570 means your company will pay roughly £1,135 in Employer NI (15% of the amount between £5,000 and £12,570).
However, because this salary is deductible for Corporation Tax, it often still works out better than taking that same amount as dividends, especially if your company is paying the higher 25% Corporation Tax rate.
Strategy 2: The Dividend Factor
Is the "Low Salary, High Dividend" model still the king?
Despite the rise in dividend tax to 10.75%, dividends remain a vital tool for profit extraction. The biggest advantage? No National Insurance.
When you take a dividend, you don't pay 8% Employee NI, and the company doesn't pay 15% Employer NI. Even with the higher dividend tax rates, this "NI-free" status usually makes dividends more attractive than a high salary once you’ve gone past the £12,570 mark.
Example for 2026:
If you want to take an extra £10,000 out of the business (assuming you’ve already used your Personal Allowance):
- As Salary: You’d lose 20% to Income Tax and 8% to Employee NI, and the company would pay 15% Employer NI.
- As Dividends: You’d pay 10.75% tax (after your £500 allowance), and the company pays 0% NI.
The dividends win on the NI saving alone, though you must remember that dividends are paid from after-tax profits (after Corporation Tax has been settled).
The Impact of Corporation Tax
Don’t forget the tax man takes his cut before you see a penny of dividends.
As your UK Chartered Accountants, we always remind clients that dividends and Corporation Tax are linked.
For 2026, Corporation Tax is still on a sliding scale:
- 19% for profits under £50,000.
- 25% for profits over £250,000.
- A tapered rate in between.
If your company is very profitable (hitting that 25% bracket), the "cost" of a dividend is higher because more tax was paid before the dividend could be issued. In these cases, we might look at other options: like higher pension contributions: to move money out of the company more efficiently.
Special Considerations for the Media & Entertainment Industry
Are you a freelancer or studio owner in the creative sector?
At Harrison’s Accountancy, we specialise in the Media and Entertainment industry. We know that your income can be "lumpy": huge projects followed by quiet periods.
In 2026, this makes "Profit Smoothing" more important than ever. If you have a bumper year, taking all that profit as dividends could push you into the Higher Rate (35.75%) or even the Additional Rate (39.35%) brackets.
Instead of taking it all now, it might be smarter to keep some profit in the company and distribute it in a future year when your income is lower. This is where having a Xero Platinum Champion in your corner helps; we can look at your real-time data to spot these tax traps before you fall into them.
How to Balance It All: Your 3-Step Checklist
So, how do you actually decide?
- Set your base salary: For most, £12,570 remains the most balanced starting point to protect your pension and use your tax-free allowance.
- Calculate your "Life Cost": How much do you actually need in your bank account each month? Take the rest as dividends, but be mindful of the £50,270 threshold where dividend tax jumps from 10.75% to 35.75%.
- Review your Pension: Employer pension contributions are one of the most tax-efficient ways to extract profit in 2026, as they attract 0% tax and 0% NI.
Put Your Tax Worries on Our Plate
Feeling a bit anxious about the maths? You’re not alone.
Tax legislation in 2026 is a maze of thresholds and percentages. Whether you are a sole trader looking to go limited or an established media business, getting the balance right can save you thousands of pounds every year.
At Harrison's Accountancy, we act as your own personal CFO. We don't just file your returns; we help you plan for the future so you can focus on what you do best: growing your business.
Ready to see if your profit extraction is as efficient as it could be?
Book a call with us today and let’s run the numbers for your specific situation.
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