There’s a certain moment every company director knows well. You open the accounts, see the profit, and think, “Great, I’ve made money.” Then the second thought arrives: “Now how do I take it out without handing half of it to HMRC for the privilege?”

And that is where the old director salary vs dividends debate starts marching in again.

For years, the advice was almost suspiciously simple: take a small salary, top it up with dividends, and enjoy the tax efficiency. Nice while it lasted. But from 6 April 2026, dividend tax has become less forgiving. The dividend allowance remains just £500, the basic dividend tax rate rises to 10.75%, the higher rate rises to 35.75%, and the additional rate stays at 39.35%. In plain English: dividends are still useful, but they are not the golden child they once were.

So what actually works now?

The irritatingly honest answer is this: salary and dividends still work best together, but the balance matters more than it used to. Guesswork is no longer a strategy. It is more of an expensive hobby.

A salary still has its place. It counts as a deductible business expense, which means it can reduce your company’s Corporation Tax bill. It also helps protect your National Insurance record, which matters for things like your State Pension. The standard Personal Allowance for the 2026/27 tax year is £12,570, so many directors still look at salary levels around that figure when planning how to pay themselves.

Dividends, of course, still have one very attractive feature: they are not subject to National Insurance. That is why directors like them so much. The problem now is that after the first £500 of dividend income, tax starts biting almost immediately. And because the basic and higher dividend rates have gone up for 2026/27, taking large dividends without proper planning has become a very efficient way to create a tax bill you were not emotionally prepared for.

Let’s make this real.

Imagine your company has £50,000 of profit before paying you anything. You now need to decide how to take money out.

If you decide to take the whole £50,000 as salary, it sounds simple, but tax efficiency politely leaves the room. A larger salary means Income Tax and National Insurance on your side, and potentially employer National Insurance on the company side too. Yes, the company gets tax relief on the salary because it is an expense, but that does not magically make it the smartest option. Salary-only tends to be the “technically possible, financially underwhelming” route.

Now let’s swing to the other extreme and say you take no salary at all and rely only on dividends. On paper, that looks attractive because there is no National Insurance on dividends. But this is where 2026/27 starts being less charming. If you take, say, £30,000 in dividends, only the first £500 falls within the dividend allowance. The remaining £29,500 is taxable, and if it all sits within your basic rate band, the dividend tax would be £3,171.25 at 10.75%.

That is not catastrophic, but it is no longer the low-tax fairy tale some older articles still pretend it is.

Now let’s look at the approach that usually works better in practice. Suppose you take a salary of £12,570 and then top up the rest with dividends. That salary uses your Personal Allowance and may help preserve your NI record, while the dividends can then be layered on top more carefully. If, after that salary, you take an additional £20,000 in dividends, the first £500 is still covered by the dividend allowance and the remaining £19,500 would be taxed at 10.75%, giving a dividend tax bill of £2,096.25 if it all remains within the basic rate band.

That is the key point directors often miss: the issue is no longer whether salary is better than dividends or dividends are better than salary. The real question is how much salary and how much dividend should be used together so that you stay efficient without tipping yourself into unnecessary tax.

And that tipping point matters. Because once your dividends move into the higher-rate band, the tax rate jumps to 35.75%. That is quite a leap from 10.75%, and it is usually the moment directors stop calling dividends “tax-efficient” and start calling their accountant.

There is also one detail worth mentioning because it is genuinely useful and not just tax-flavoured admin theatre: dividends from shares held inside a Stocks and Shares ISA are exempt from tax. That will not solve the salary-versus-dividends question for your own company payments, but for personal investing it absolutely matters. HMRC is not famous for generosity, so when they do leave a door open, it is worth noticing.

So what actually works in 2026/27?

In most real-life director situations, the sensible answer is still a planned mix of salary and dividends. Enough salary to use allowances efficiently and keep your record in shape. Then dividends, but taken with actual awareness of the new rates and bands, not just because “that’s what people do.” The old small-salary-big-dividend strategy is not dead, but it is no longer something you should run on autopilot.

That is where we, BILINSCOPE LTD, come in. We help directors work out what payment structure actually suits their numbers, instead of relying on recycled advice from the era when dividend tax was kinder and everyone was slightly more relaxed. We look at profit, allowances, tax bands, and timing, then build a structure that keeps things legal, sensible, and as tax-efficient as possible.

Because paying yourself as a director should not feel like a trap. Complicated, yes. Slightly annoying, of course. But not a trap.

If you are still using the same salary and dividend strategy you used a few years ago, there is a good chance it is no longer the best option. The 2026/27 dividend tax changes made sure of that. The allowance is still only £500, the basic rate is now 10.75%, and the higher rate is now 35.75%. That means every decision matters a bit more, and casual planning tends to become expensive planning.

So no, the answer is not simply “salary” or “dividends.”

The answer is: the right mix, using the right numbers, at the right time.