On 6 April 2026 the dividend ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. Nothing else in the structure moved: the personal allowance is still £12,570, the basic rate band still ends at £50,270, the dividend allowance is still £500, and the secondary threshold for employer National Insurance is still £5,000 with the rate still at 15%.
The question everyone asks is whether the change flips the answer on how a one-person company should pay its director. It does not. But it does make the arithmetic worth doing properly, because the gap between the options is now wide enough to matter and the received wisdom you will read on forums is a year out of date.
The three levers, and what each one costs
Money leaves a company to reach you in one of three ways, and they are taxed on completely different bases.
- Salary is deductible against corporation tax, and so is the employer National Insurance on it. Above £12,570 it attracts employee National Insurance at 8%, and above £5,000 it attracts employer National Insurance at 15%. It counts towards your state pension record and it is what mortgage lenders understand.
- Dividends are paid out of profit after corporation tax, so they carry no deduction at all. They attract no National Insurance whatsoever, and after the £500 allowance they are taxed at 10.75%, 35.75% or 39.35% depending on which band the income falls in.
- Employer pension contributions are deductible against corporation tax and carry no National Insurance and no income tax at the point they are paid. The money is locked up until 55, rising to 57 in April 2028, which is the whole of the trade-off.
One rule shapes everything below: a company whose only employee is its sole director cannot claim the £10,500 Employment Allowance. If your company is genuinely just you, the first £10,500 of employer National Insurance is not free. If you employ someone else paid above the secondary threshold, it is, and the answer in this article changes.
The salary that earns a qualifying year now costs money
The traditional advice was to set the salary at the point where it built a qualifying year for the state pension without triggering any National Insurance. In 2026/27 that point does not exist.
A qualifying year needs earnings at or above the lower earnings limit of £6,708. Employer National Insurance starts at the secondary threshold of £5,000. The secondary threshold now sits below the lower earnings limit, so the smallest salary that earns you a qualifying year costs (£6,708 − £5,000) × 15% = £256.20 of employer National Insurance. There is no longer a free option, only cheaper and dearer ones.
Worked example: £70,000 of profit before the director is paid
The figures are illustrative. A consultant runs a limited company with no other employees. Before paying herself anything, the company has £70,000 of profit. She has no other income and wants everything out this year. She is not caught by the off-payroll rules, which would change the analysis entirely — our post on IR35 for contractors in 2026 covers that.
Because the profit lands between £50,000 and £250,000, the company is in the corporation tax marginal relief band, where the effective rate rises from 19% towards 25% and each extra pound of profit is taxed at a marginal 26.5%.
Salary £5,000 — the secondary threshold
No National Insurance of any kind, and no income tax. The company deducts £5,000, leaving £65,000 of taxable profit. Marginal relief of 3/200 × (£250,000 − £65,000) = £2,775 reduces the corporation tax from £16,250 to £13,475, leaving £51,525 to distribute.
Personal income is £56,525. The personal allowance covers the salary and £7,570 of the dividends; the £500 dividend allowance takes another slice at 0%; £37,200 is taxed at 10.75% and £6,255 at 35.75%. Income tax is £6,235, and cash in hand is £50,290.
Salary £12,570 — the full personal allowance
Employer National Insurance of (£12,570 − £5,000) × 15% = £1,135.50. No employee National Insurance, because the primary threshold is also £12,570. No income tax, because the personal allowance covers it.
The company deducts both the salary and the employer contribution — £13,705.50 in total — leaving £56,294.50. Marginal relief of £2,906 brings corporation tax to £11,168, and £45,126 is available as dividends. Personal income tax comes to £6,654, and cash in hand is £51,043.
That is £753 better than the £5,000 salary, even after paying £1,135.50 of employer National Insurance that the lower salary avoided entirely. The reason is that every pound of salary and employer National Insurance is deducted at the 26.5% marginal corporation tax rate, while the dividend it displaces would have been taxed at 10.75% or 35.75% personally on top of corporation tax already paid.
Salary £50,270 — filling the basic rate band with pay
Employer National Insurance of £6,790.50, employee National Insurance of £3,016 and income tax of £7,540. The company's remaining profit is £12,939.50, taxed at 19% because it now falls below the £50,000 lower limit. Cash in hand is £46,627 — £4,416 worse than the best option. The 23% combined National Insurance cost on salary is simply more expensive than corporation tax plus dividend tax at these levels.
What the April 2026 change actually took
Run the winning option on last year's dividend rates and the personal tax bill is £5,761 rather than £6,654. The two percentage point increase costs this director £893 on identical profits. It does not change which option wins, and it is not large enough to make a salary above the personal allowance attractive, because National Insurance on salary is still the more expensive route by a wide margin.
The pension comparison is not close
For a company whose profits sit comfortably inside the £50,000 to £250,000 band, take £10,000 of profit and follow it two ways.
Deductible, saving corporation tax at the marginal 26.5%: £2,650
Net cost to the company: £7,350
Amount landing in the pension: £10,000
Corporation tax at the marginal 26.5%: £2,650
Distributable: £7,350
Dividend tax at the 35.75% upper rate: £2,628
Amount landing in your bank account: £4,722
The same £10,000 of profit is worth more than twice as much inside a pension as outside it, and the gap widened on 6 April. The annual allowance is £60,000, tapering for very high earners, and unused allowance can be carried forward from the previous three tax years. Employer contributions must be wholly and exclusively for the purposes of the trade, which for a working director drawing a modest salary is rarely in doubt. Our guide to pensions when you work for yourself covers the wider position.
The three ways this goes wrong in practice
Dividends paid without distributable reserves. A dividend can only be paid out of accumulated realised profits after corporation tax. Paying one when the reserves are not there does not make it a dividend; it makes it a director's loan. Draw regularly against a management figure that later turns out to be wrong and the whole year can be reclassified.
The director's loan account going overdrawn. If a loan to a participator is still outstanding nine months and one day after the year end, the company pays a section 455 charge. For loans advanced on or after 6 April 2026 that rate is 35.75%, up from 33.75%, because it tracks the dividend upper rate. The tax is refundable once the loan is repaid, but the refund only arrives nine months after the end of the accounting period in which repayment happens, so the cash is gone for a long time. A beneficial loan interest benefit in kind can apply on top.
No paperwork. Each dividend needs a board minute and a dividend voucher, dated when the dividend was declared. Transfers labelled "wages" in the bank feed, with no minutes and no vouchers, are the first thing an inspector asks for.
What to do this week
- Check your payroll is running at the salary you think it is. A company that never filed a Real Time Information submission has not paid a salary, whatever the bank statement says.
- If your only employee is you, confirm the payroll is not claiming the Employment Allowance. Claiming it wrongly is a repayment plus interest.
- Pull an up-to-date profit figure and check whether the company is inside the marginal relief band, because that is what makes deductions worth 26.5% rather than 19%.
- Check your director's loan account balance today, and diarise the date nine months and one day after your year end.
- Look at your state pension forecast. If you have been on a £5,000 salary, you may be missing qualifying years you assumed you had.
- Decide the pension contribution before the year end, not after. It is a company decision that has to be paid, not accrued, in the accounting period to be deductible in it.
- Make sure a dividend voucher and a minute exist for every dividend taken this year. If they do not, produce them now rather than at the year end.
If you are still deciding whether to incorporate at all, the trade-off has narrowed considerably over the last three years and the answer is no longer automatic — our comparison of working self-employed against running a limited company works through it, and the tax calendar sets out the filing dates either way.
Where we help
We run the payroll, set the salary at the level that actually wins for your profit level rather than the level a forum recommended, keep the reserves position visible so dividends are legal when they are taken, produce the minutes and vouchers, and watch the director's loan account against the section 455 date. Fixed fees from £19 + VAT a month. Get started.
