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If you’re a limited company director still drawing your income the same way you were two years ago, the chances are you’re now paying significantly more tax than you need to. The 2025 Autumn Budget and the Spring Statement 2026 have fundamentally shifted the maths behind the salary-plus-dividend model that hundreds of thousands of UK owner-managers have relied upon for years.
This article sets out the current landscape clearly — what’s changed, what still works, and where the real opportunities lie in 2026/27.
What’s Actually Changed: The Dividend Tax Hike You Cannot Ignore
The headline change is straightforward but material. From 6 April 2026, the ordinary dividend rate moved from 8.75% to 10.75%, and the upper rate jumped from 33.75% to 35.75%. The additional rate, which applies to income above £125,140, remains unchanged at 39.35%.
The primary target of these changes is the director-shareholder of a small or medium-sized limited company extracting income in the £30,000 to £125,000 range — exactly the profile that characterises most owner-managed businesses in the UK.
These are not marginal adjustments. A higher-rate taxpayer receiving £10,000 in dividends outside an ISA now pays £358 more per year in dividend tax than in 2025/26. Multiply that across a typical director’s dividend income and the annual cost becomes significant — and entirely avoidable with the right structure.
The government estimates this will raise an estimated £280 million of additional tax in the 2026/27 tax year, rising to £1,390 million in 2030/31. The Treasury is not expecting director-shareholders to sit still. The question is whether your extraction strategy moves faster than the tax changes.
The Salary Question: What’s the Right Level in 2026/27?
Salary remains the foundation of any extraction strategy, but the optimal level depends on your company’s specific circumstances.
For 2026/27, there are two key salary thresholds to understand: the Lower Earnings Limit (£6,708), which is the minimum salary required to secure state pension credits and carries lower exposure to employer NIC; and the personal allowance (£12,570), which fully utilises the tax-free personal allowance while creating additional Corporation Tax relief.
The general consensus among tax specialists is that, where a company has sufficient taxable profits, a salary set at the personal allowance nearly always delivers higher post-tax income. The Corporation Tax deduction on the additional salary — combined with the reduction in dividends required — typically outweighs the National Insurance cost.
One important caveat: employer NIC contributions are charged at 15% on the proportion of salary above the £5,000 secondary threshold. For most one-person companies, the Employment Allowance is not available. This makes the NIC cost a genuine consideration when setting salary levels, and the right answer genuinely varies between businesses.
Two common mistakes to avoid: taking no salary at all prevents you from earning state pension qualifying years and can limit pension contributions. Misunderstanding director NIC rules is also a significant risk — director NICs are calculated annually, which can produce unexpected bills if planned incorrectly.
Dividends: Still Worthwhile, but No Longer a Rubber Stamp
Despite the rate increases, dividends remain a core part of efficient extraction for most directors. The key is recognising that the old formulaic approach — low salary, maximum dividends — requires active review rather than passive continuation.
The salary-plus-dividends model remains more tax-efficient than pure salary extraction, but the margin has narrowed and no longer supports a formulaic approach.
The dividend allowance remains at £500 for 2026/27, unchanged for both years. The basic and higher rate dividend tax rates are now 10.75% and 35.75% respectively, making proactive tax planning more essential than ever.
For directors whose salary already sits within the basic rate band, dividend income stacked on top may now push into higher rate territory more quickly than before. If your salary already fills the higher-rate band, your dividends will be taxed at the higher rate of 35.75% — not the basic 10.75% — even if the dividend amount itself seems small.
The practical implication is that the threshold at which pension contributions become more attractive than dividends has moved. For many directors, that threshold is now lower than it was in 2025/26.
Employer Pension Contributions: The Most Powerful Tool in the Box Right Now
If there is a single strategy that has increased in relative attractiveness as dividend rates have risen, it is employer pension contributions made directly from the company. This is not a new concept, but in 2026/27 it is arguably the most efficient extraction mechanism available to most directors.
Employer pension contributions are usually treated as an allowable business expense, which means they can reduce the company’s taxable profits and therefore lower the Corporation Tax liability. For a company paying the main rate, that relief is worth 25p for every £1 contributed.
The biggest advantage of paying into a pension through your limited company is that the salary threshold doesn’t apply. This means you can keep taking a salary of £12,570 a year and still pay up to £60,000 into your pension each year. This is particularly powerful for directors who take most of their income as dividends and would otherwise have limited personal contribution capacity.
The Annual Allowance for 2026/27 is £60,000 (or 100% of your UK earnings, whichever is lower). This includes employee contributions, employer contributions, and any basic-rate tax relief added by the provider. If you earn more than £260,000, the Tapered Annual Allowance applies — it reduces the allowance by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000.
Carry-Forward: A Significant Opportunity for the Right Director
Directors in their forties and early fifties who are accumulating wealth for the long term and do not need every pound of profit now should treat employer pension contributions as a primary extraction tool rather than a supplementary one. Carry-forward can make this particularly powerful in high-profit years. A director whose company has had three lean years followed by a strong 2025/26 and 2026/27 may have substantial unused annual allowance available — potentially up to £180,000 across three years — to absorb as employer contributions in a single tax year.
One critical warning: if you have previously flexibly accessed a defined contribution pension — for example by taking income through flexi-access drawdown — the Money Purchase Annual Allowance (MPAA) may apply. For 2026/27, the MPAA is £10,000 per tax year and carry forward cannot be used for money purchase contributions. If triggered, this significantly limits how much you and your company can contribute to a defined contribution pension. If you have ever drawn flexibly from a pension, this must be reviewed before making significant contributions.
An Optimal Framework for 2026/27
Based on current rates and allowances, a well-structured approach for most owner-managed businesses looks broadly as follows:
Step 1 — Salary at the personal allowance (£12,570): Utilises the full income tax-free threshold and generates Corporation Tax relief. Protects state pension entitlement. NIC position should be reviewed where Employment Allowance is unavailable.
Step 2 — Employer pension contributions up to the Annual Allowance: Corporation Tax-deductible at source, no income tax or NIC triggered personally. Up to £60,000 per year, with potential to use carry-forward for significantly more in high-profit years.
Step 3 — Dividends for remaining income needs: Taxed at 10.75% (basic) or 35.75% (higher), but still more efficient than salary beyond the personal allowance in most scenarios. Timing of declarations should be considered carefully relative to year-end profitability.
While pension contributions are highly tax-efficient, the money is locked away until you reach pension age (currently 55, rising to 57 in 2028). Make sure you have sufficient liquidity for your current needs before maximising pension contributions.
The Bottom Line
The tax environment for limited company directors has changed materially since April 2026. The dividend rate increases are not a minor administrative adjustment — they represent a deliberate policy shift designed to narrow the gap between salary and dividend income. For directors extracting income in the £50,000 to £125,000 range, the cumulative effect of higher dividend rates, frozen thresholds, and rising employer NIC is substantial.
The good news is that the tools available to address this have not changed — only the relative weighting between them has shifted. Employer pension contributions, salary optimisation, and carefully timed dividend planning together still offer meaningful tax efficiency. What they now require is active, annual review rather than set-and-forget.
If you have not revisited your extraction strategy since the Spring Statement 2026, now is the time to do so. Book a free initial consultation with us and start planning now.
The information in this article is based on UK tax rates and legislation for the 2026/27 tax year and is intended for general guidance only. Individual circumstances vary significantly, and nothing in this article constitutes personal tax advice. Please speak to a qualified accountant or tax adviser before making changes to your remuneration structure.