Dividend tax rates crept up another 2% on 6 April. Against frozen income tax thresholds, tighter corporation tax and the Employment Allowance sitting just out of reach for solo directors, the obvious question for owner-managers is whether the traditional low-salary-plus-dividends formula still wins on net income. Short answer: yes — for a one-person company — but the margin has narrowed. Here are the numbers.
What’s new for 2026/27
The main change hitting owner-managers this year is the dividend tax rate rise from 6 April 2026 (ITA 2007, Part 2 Chapter 2, as amended by Finance Act 2025):
- Ordinary rate: 8.75% → 10.75%
- Higher rate: 33.75% → 35.75%
- Additional rate: unchanged at 39.35%
The £500 dividend allowance is preserved, as is the £12,570 personal allowance — the latter frozen at that level, along with the basic-rate threshold, until April 2031. Fiscal drag continues doing the Chancellor’s work without ever appearing as a “tax rise” on a Treasury line item.
The three structural pressures to know
Three other moving parts shape the calculation this year:
- Corporation tax marginal relief (CTA 2010, Part 3 Chapter 3A, ss.18A–N). Company profits between £50,000 and £250,000 sit in the marginal band, giving an effective tax rate of 26.5% on the slice in that range — which reduces the amount available to pay as dividends.
- Employer’s National Insurance is 15% above a £5,000 secondary threshold (in force from 6 April 2025), making additional salary marginally more expensive to the company than it used to be.
- The Employment Allowance is £10,500 (NICs Act 2014, as amended) — but sole-director, sole-employee companies remain excluded under the Employment Allowance (Excluded Persons) Regulations 2016 (SI 2016/344).
The test: does low salary + dividends still win?
We ran the numbers on a typical solo owner-manager — Mrs Hare, sole director and shareholder of Zebra Ltd, with £200,000 of company profit before her own remuneration. Each scenario leaves the same amount in the company so the comparison is like-for-like.
| Scenario | Salary | Dividends | Net income |
| Low salary + dividends | £12,570 | £80,000 | £73,449 |
| Mid salary + dividends | £22,570 | £71,548 | £72,718 |
| Higher salary + dividends | £60,000 | £39,910 | £71,178 |
The low-salary-plus-dividends route wins — by £731 against the mid-salary scenario and £2,271 against the higher-salary scenario. Not a windfall, but it’s free money in a year where every £100 counts.
When the answer changes
A few circumstances flip the calculation:
- You’re not the only employee. Put your partner on a genuine payroll role and the company qualifies for the Employment Allowance, which changes the salary maths materially.
- You need earnings on paper. Mortgage applications, childcare eligibility, state pension qualifying years and the annual pension contribution allowance all respond to salary, not dividends.
- Company profits comfortably above £250,000. Once you’re out of the marginal band and into the 25% main rate, the balance tilts slightly — though low salary plus dividends usually still wins.
- Pension contributions. Employer pension contributions remain one of the most tax-efficient extraction routes available and often outperform both salary and dividends, especially at higher income levels.
How we can help
For a classic one-person company, low salary plus dividends still edges ahead for 2026/27 — but the margin is slim enough that the right answer depends on your wider picture: mortgage plans, pension strategy, family circumstances, whether you’ve got a second employee lined up. We model profit extraction for every owner-manager client each spring so the year’s remuneration package pulls its weight across the whole picture. If you’d like a second pair of eyes on yours before the 2026/27 numbers settle, get in touch. We’ll answer the phone.
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