One of the most common questions we are asked by company directors is a simple one: what is the best way to pay myself? It is also one of the most important, because the way you take money out of your company affects how much tax you and the company pay, and the right approach changed again on 6 April 2026.
This guide explains the main options, how each is taxed in the 2026/27 tax year, and the points to weigh up when deciding on your mix.
The two main routes: salary and dividends
Most director-shareholders take a combination of salary and dividends, and there are good reasons to use both rather than relying on one alone.
A salary is treated as an employee cost. It is taxed as earnings through PAYE, it attracts National Insurance, and, importantly, it is deductible against the company’s profits, which reduces its Corporation Tax bill. A dividend, by contrast, is a distribution of profit to shareholders. It does not attract National Insurance, but it is not deductible for the company, and it can only be paid out of distributable profits.
How a salary is taxed
For the rest of the UK in 2026/27, salary is taxed at 20% (basic rate), 40% (higher rate) and 45% (additional rate), after your personal allowance of £12,570. Scottish taxpayers have their own bands and rates.
There are two layers of National Insurance to consider:
- Employee National Insurance is paid at 8% on earnings between £12,570 and £50,270, and 2% above that.
- Employer National Insurance is paid by the company at 15% on earnings above the secondary threshold of £5,000.
The company can claim the Employment Allowance, currently £10,500, to offset employer National Insurance. However, this is not available to companies where the sole employee earning above the secondary threshold is also the only director, which catches many one-person companies.
Even a modest salary has value. It is deductible for Corporation Tax, and a salary at the right level helps preserve your entitlement to the State Pension and certain benefits by maintaining your National Insurance record.
How dividends are taxed, and what changed in April 2026
This is where the 2026/27 changes bite. From 6 April 2026, the dividend tax rates increased by two percentage points at the basic and higher rates. The rates are now:
- 10.75% on dividends within the basic rate band (up from 8.75%).
- 35.75% on dividends within the higher rate band (up from 33.75%).
- 39.35% on dividends within the additional rate band (unchanged).
Everyone still has a tax-free dividend allowance, but it remains at just £500. In practical terms, the change means roughly £20 more tax for every £1,000 of dividends taxed at the basic or higher rate, which makes extracting profit by dividend more expensive than it was.
Dividends also come with administrative requirements that are easy to overlook. They can only be paid from distributable profits, the directors should formally declare them at a board meeting with minutes kept, and a dividend voucher should be issued to each shareholder. Getting this paperwork right matters, because a dividend that is not properly supported can be challenged.
Pension contributions: an efficient alternative
Employer pension contributions are one of the most tax-efficient ways to extract value from a company. The company can generally deduct the contributions against its profits, there is no National Insurance to pay, and there is no immediate Income Tax charge on you, provided contributions stay within the annual allowance of £60,000 (which is reduced for high earners). The trade-off is that the money is tied up until you are able to draw your pension.
Benefits in kind
Providing benefits, such as a company car or private medical cover, is another route, but most benefits are taxable on you as earnings, and the company pays Class 1A National Insurance at 15%. Some benefits are more tax-efficient than others, and a few, such as electric company cars, currently carry favourable treatment. It is worth taking advice before providing a benefit, as the tax cost varies considerably.
A word of caution on director’s loans
Borrowing from your company by way of a director’s loan can be useful for short-term cash flow, but it carries a trap that became more expensive this year. If the loan is still outstanding nine months and one day after your company’s year end, the company must pay a temporary tax charge under section 455. For loans made on or after 6 April 2026, that rate increased from 33.75% to 35.75%, in line with the dividend change. The charge is repaid once the loan is cleared, but it is a real cash-flow cost in the meantime. In addition, a loan of more than £10,000 that is interest-free or low-interest creates a taxable benefit in kind. If you use your loan account regularly, it is well worth planning around these rules.
Getting the mix right
There is no single answer that suits every director. The most efficient combination of salary, dividends, pension and benefits depends on your other income, whether your company can claim the Employment Allowance, how many people it employs, your profit levels and your longer-term plans. Following the April 2026 changes, it is a good moment to review your arrangements rather than assume that last year’s approach is still the best one.
At ISA Consortium, we prepare a tailored remuneration plan for our company clients each year, modelling the options so that you can see the combined effect on you and the company before you decide. If you would like us to review how you pay yourself for 2026/27, please get in touch.
This article is for general information only and does not constitute tax advice. Tax depends on your individual circumstances and the rules may change. Please speak to us before acting.
