Dividend tax rates have increased by 2% for 2026/27. Add that on to the other recent tax hikes and it starts to look very expensive to run a company. Is the combination of a low salary topped up with dividends still tax efficient?
What’s new?
There aren’t many income tax changes for the new tax year. In fact, that’s one of the problems with the tax system; income tax thresholds have been frozen since 2021 and based on current plans won’t be defrosted until 2031. The result is fiscal drag.
There is one change that will impact company owner-managers, however, the increase in dividend tax rates.
Profit extraction
This brings us to the age-old question of tax-efficient profit extraction. Several tax changes in recent years have eroded the tax efficiency of dividends.
Tip. If you’re the sole director/employee, a low salary plus dividends remains the gold standard for profit extraction.
Doing the sums
We’ve put the tip to the test. The example below illustrates the consequences across a sample range of salaries and dividends.
Example. Amy is the sole director and shareholder of Acom Ltd. Based on current performance she assumes Acom will make profits of £200,000 per year before she takes either salary or dividends. To make the sums comparable, in each case the same amount of income is left in the company to accumulate. The figures show the advantage of taking low salary and higher dividends (see Further information).
2026/27
| Salary (£) | Dividends (£) | Net Income (£) |
| 12,570 | 80,000 | 73,449 |
| 22,570 | 71,548 | 72,718 |
| 60,000 | 39,910 | 71,178 |
Granted, the savings aren’t huge, but when the tax system is constantly being tinkered with to squeeze as much out of you as possible, you have to take the savings where you can.
Circumstances
The examples show that for “one man bands” a low salary topped up with dividends leaves the owner-manager with more net income compared to higher salaries. However, there is a wide range of profit extraction methods available, see Further information.
What works best for one owner-manager won’t work for another, so whilst in principle low salary topped up with dividends is tax efficient, you should build a strategy each year based on your and your company’s circumstances.
Despite the increase in dividend tax rates, a small salary topped up with dividends is still more tax efficient than drawing a higher salary. However, the gap is closing and owner-managers should review profit-extraction strategies year on year to maximise tax efficiency.
