If you’re a limited company director, one question comes up every single year:

“Should I pay myself through salary or dividends?”

The honest answer?
It depends.

But in 2026, the margin for error is smaller than ever ⚠️ — and getting this wrong can quietly cost you thousands in unnecessary tax.

Let’s break it down properly.

💼 Salary

• Paid through PAYE

• Subject to Income Tax

• Subject to National Insurance (employee & employer)

• Tax-deductible for the company

📈 Dividends

• Paid from post-corporation tax profits

• No National Insurance

• Not tax-deductible for the company

• Taxed at dividend rates personally

Both have their place. The key is how they work together, not choosing one over the other.

While rates can change year to year, the structure remains consistent:

• Dividend allowance remains significantly reduced compared to previous years

• Corporation Tax for many SMEs sits at up to 25%

• National Insurance remains a real cost for both the company and director

• Personal allowance is still £12,570 (assuming no tapering)

The days of “just take it all as dividends” are long gone.

In most cases, the most tax-efficient strategy in 2026 will be:

✅ A small, tax-efficient salary
➕
✅ Dividends up to your basic rate band (where possible)

Why?

Because this approach:

• Protects your State Pension record

• Minimises National Insurance

• Reduces Corporation Tax

• Uses personal tax bands efficiently

It’s structured. Intentional. Strategic.

Dividends feel attractive because:

• No National Insurance

• Simple to declare

• Flexible timing

But remember:

• They are paid from profits after Corporation Tax

• They don’t reduce the company’s tax bill

• You must have sufficient retained profits

• They cannot create or increase a loss

If cashflow dips, dividends are the first thing that must stop.

Salary, on the other hand, is deductible — meaning it reduces your Corporation Tax bill.

Because:

• Employer’s National Insurance increases company cost

• Employee’s National Insurance reduces what you receive

• Income Tax hits sooner

• You can push yourself into higher tax bands faster

For most directors, a full salary approach is rarely optimal.

Let’s assume:

• Company profit before director pay: £80,000

• Single director-shareholder

• No other income

If you:

Option 1: Take everything as salary

You’ll incur:

• Employer NI

• Employee NI

• Higher Income Tax

The company reduces its Corporation Tax — but total tax leakage is significant.

Option 2: Structured approach

• Salary set around NI thresholds

• Remaining extracted as dividends within basic rate band

This typically results in:

• Lower overall personal tax

• Lower NI exposure

• Efficient use of allowances

The difference can easily run into several thousand pounds annually 💰

Dividends aren’t always the answer.

They can cause issues where:

• You’re applying for a mortgage

• You want predictable monthly income

• You have fluctuating profits

• You’re planning pension contributions

• You’re approaching higher-rate tax territory

Extraction planning should align with your wider financial goals — not just tax minimisation.

With frozen tax thresholds and higher Corporation Tax rates now embedded, directors need to think ahead:

• Are you close to higher-rate tax?

• Are you building retained profits strategically?

• Should you consider pension contributions instead of dividends?

• Is your spouse appropriately structured within the company?

This isn’t just about “how much can I take?”

It’s about:

“What is the most efficient long-term strategy for me and my business?”

There is no universal “best” method.

But there is almost always a more efficient structure than taking money randomly throughout the year.

At Llewellyns, we review director extraction annually — not reactively at year-end, but proactively alongside:

• Corporation Tax forecasts

• Dividend planning

• Personal tax projections

• Cashflow forecasting

Because tax efficiency isn’t accidental.

It’s planned.

If you’re paying yourself without a clear structure, you’re likely overpaying somewhere — either personally or corporately.

Small adjustments.
Big long-term impact.

If you’d like us to review your 2026 extraction strategy, we’re happy to take a look.