For many small limited companies, especially those with one director-shareholder, the most tax‑efficient way to take income is usually a mix of salary and dividends. While the principles stay broadly the same each year, key thresholds do sometimes change, and those changes can affect everything from your personal tax bill to childcare entitlements. Below is an overview of what to consider for the 2026/27 tax year.

Director salaries normally fall into one of two efficient ranges:

This is often used when the only person on the payroll is a director, so the company does not qualify for the Employment Allowance. This level:

• Keeps you within the National Insurance credits system (protecting your State Pension record)
• Minimises tax and NI

If your company has more than one director or another employee on payroll, you may be eligible for the Employment Allowance, which reduces employer’s NI by up to £10,500. In these cases, taking a higher salary can be more tax‑efficient because:

• Employer’s NI is covered by the Employment Allowance
• You get more corporation tax relief on the salary

This option isn’t available for single-director companies with no other eligible staff.

In some situations - particularly where there are two directors, Employment Allowance is available, and the business wants to extract higher levels of income - salaries of up to around £40,000 each can be more tax‑efficient.

This depends heavily on your wider income, allowances and business profits, so it should always be checked with your accountant.

If you're looking to take any further income from your company after the salaries, you would take dividends, although they can only be paid when you have enough profit in the company.

Dividends are taken from post tax profits which means that you don't get tax relief on them like you do for salaries.

You should also make sure that dividends are declared in accordance with your shareholdings if there are more than one shareholders.

The dividend tax rates in the basic rate band will increase to 10.75% (previously 8.75%) and 35.75% (previously 33.75%) from 6 April 2026.

The tax-free personal allowance is £12,570, but you lose £1 of personal allowance for every £2 earned over £100,000.

If your total income (salary + dividends + any other income) exceeds £100,000, your personal allowance tapers away.

This creates an effective tax rate of 60% within the £100,000-£125,140 band, making careful planning essential.

You may need to pay back some or all of your Child Benefit if your adjusted net income exceeds £60,000. Dividends count towards this, which often catches directors by surprise.

Tax-free childcare eligibility is based on both parents working, earning the minimum threshold (as salary, not dividends) and not earning over £100k (total income).

So again, this is a key reason why personalised planning is essential.

Think about how much income you need (or want) your company to provide and speak to your accountant and the best way to optimise this whilst taking into account your personal circumstances and goals.

Don't forgot to use other tax-efficient ways to extract profits from your company such as pension contributions, relevant life insurance, trivial benefits etc. Check out our previous blogs for more information on these.

This article is general guidance only, tax rules are complicated, and the right salary/dividend balance varies person‑to‑person.

If you're unsure what’s best for your situation, speak to your accountant, or if you’d like help from CJL Accountancy, we’d be happy to walk you through the best setup for the 2026/27 tax year. Contact us here.