As a limited company director, one of the most effective ways to extract profits from your company is a strategic blend of salary and dividends. However, with rising corporate tax bands and adjusted dividend allowance thresholds, the math has evolved. Here is how to construct a tax-efficient extraction model.
1. The Low-Salary Strategy
Typically, directors pay themselves a salary up to either the Primary Threshold for National Insurance (£12,570) or the Lower Earnings Limit (£6,396). Paying up to the Primary Threshold secures your state pension contribution credits without triggering employee or employer Class 1 National Insurance Contributions (NICs). Moreover, this salary is a fully deductible business expense for Corporation Tax.
2. Utilizing Dividends
Dividends are paid from post-tax company profits. After taking a base salary, any remaining cash is extracted as dividends. The first £500 of dividends in the UK is tax-free under the dividend allowance. Beyond that, for 2026/27 dividend income is taxed at:
- Basic rate: 10.75%
- Higher rate: 35.75%
- Additional rate: 39.35%
The basic and higher rates each rose by 2 percentage points from 6 April 2026, so the salary/dividend calculation is tighter than in previous years — but a blend is still usually more efficient than an all-salary approach.
3. The Combined Picture
When combining corporate tax calculations with personal tax bands, the "perfect" dividend-salary ratio is deeply dependent on your business profits and overall income levels. In our 1-on-1 consultations, we map out personalized scenarios to guarantee you minimize both your company and personal tax burdens.