Directors: Your Old Salary and Dividend Split May Now Be Costing You Money

Salary plus dividends is the standard way most directors pay themselves. It's efficient, familiar, and easy to leave on autopilot. That's exactly the problem. A split that worked well two years ago may now be costing you money.

Here's what's changed, and why your pay strategy needs a fresh look.

Dividend Tax Rates Have Gone Up

From 6 April 2026, dividend tax rates rose by 2 percentage points across the board. The basic rate increased from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate stayed at 39.35%, and the £500 dividend allowance is unchanged.

For a director drawing dividends in the basic rate band, that's an extra £20 of tax for every £1,000 taken out. Higher-rate directors face the same increase. If you haven't recalculated your take-home pay against these new rates, your numbers are out of date.

Salary Planning Has Changed Too

Employer National Insurance now sits at 15%, charged on earnings above the £5,000 secondary threshold. Sole directors with no other employees can't claim the £10,500 Employment Allowance that shelters many small companies from this cost.

This changes where the optimal salary level sits. Paying yourself at the old "sweet spot" figure may now trigger employer NIC you weren't factoring in, while a different salary level could preserve your State Pension qualifying year at a lower cost.

Company Pension Contributions May Be More Efficient

With dividend tax higher and employer NIC biting into salary options, company pension contributions are worth another look. Contributions made directly by the company are generally a deductible business expense and don't attract income tax, dividend tax, or employer NIC in the way salary or dividends do. For directors already extracting more than they need to live on, this route can be a more tax-efficient way to build wealth from company profits.

Why This Needs Reviewing Annually

Your pay strategy isn't a one-time decision. Tax rates, NIC thresholds, and allowances move every year, and a structure built for 2023/24 rates isn't automatically right for 2026/27. Autopilot is convenient, but it's also how directors quietly overpay.

A Quick Word of Caution

This is general information, not personal tax advice. The right salary and dividend split depends on your company's profits, your personal income from other sources, and your long-term goals. Speak to your accountant before changing how you pay yourself.

Source: GOV.UK — Changes to tax rates for property, savings and dividend income

📺 Watch the full breakdown on Instagram:

https://www.instagram.com/p/Dctyb2zAae9/

Haven't reviewed your director pay recently? Speak to your accountant and check if it still works for you.

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