Dividends vs Salary in 2026: The Answer Has Changed Again

Posted: 15 April 2026

For many owner-managed companies, the “salary vs dividends” question has always been central to tax planning.

But from April 2026, the balance has shifted again — and sticking with last year’s approach could now cost you more than you expect.

What’s Changed?

Three key developments are driving the change:

1. Higher dividend tax rates
   Dividend tax rates have increased again, while the dividend allowance remains at just £500. This means more extracted profits are now taxed at higher rates.
2. Employers’ NIC rates
   Employers’ national insurance rates remain a significant factor. While salary can still be efficient at lower levels (particularly up to the NIC threshold), higher salaries bring increased employer and employee NIC costs.
3. Greater focus on pension planning
   With higher dividend tax rates, pensions are becoming a more attractive route for profit extraction, particularly for companies with surplus cash.

The Traditional Approach (And Why It’s Changing)

Historically, many directors followed a simple model:

• Take a low salary (up to the NIC threshold); and
• Extract the rest as dividends.

This worked well because dividends were taxed more favourably on the individual and avoided NIC.

However, with:

• increasing dividend tax rates;
• reduced allowances; and
• increasing scrutiny on remuneration strategies

…the gap between salary and dividends has narrowed.

What Should You Be Doing Now?

There is no longer a one-size-fits-all answer. Instead, the right strategy depends on your circumstances — but there are some clear principles.

1. Review Your Salary Level

A minimal salary is not always optimal anymore.

You should consider:

• whether taking a slightly higher salary (despite NIC) improves tax efficiency;
• the impact on pension contributions and borrowing capacity;
• maintaining entitlement to state benefits.

2. Be More Selective with Dividends

Dividends are still important — but less universally efficient.

Key considerations:

• timing (e.g. spreading across tax years);
• use of spouse allowances (where appropriate);
• avoiding unnecessary higher-rate exposure.

3. Don’t Overlook Pensions

Pensions are increasingly central to extraction planning.

Advantages include:

• corporation tax relief on contributions;
• no NIC;
• tax-efficient long-term growth.

For many clients, pensions now form a core part of the extraction strategy, not just a retirement afterthought.

However, this is tempered by the intended introduction of pension pots into the inheritance tax regime from April 2027.

4. Think Holistically — Not Year by Year

The biggest mistake we see is planning in isolation.

Effective strategies take into account:

• multi-year profit extraction;
• future exit plans;
• personal cashflow needs; and
• inheritance tax planning

A Simple Illustration

For many directors, the optimal mix in 2026 may now look more like:

• a moderate salary (not minimal);
• targeted dividends (not full extraction); and
• regular pension contributions.

…but this will vary depending on income levels and business structure.

The Risk of Doing Nothing

Perhaps the biggest risk is assuming last year’s approach still works.

With higher taxes and tighter allowances, doing nothing is now a decision — and often an expensive one.

How We Can Help

We are currently reviewing remuneration strategies for many of our clients ahead as the new tax year starts.

If you would like us to:

• review your current extraction strategy;
• model alternative scenarios; or
• align your remuneration with longer-term planning

please get in touch with your usual RJP contact or partners@rjp.co.uk

RJP LLP – Insight that goes beyond compliance.