For years owner manager remuneration packages have relied on a familiar default: take a small salary and the rest as dividends. It has been widely shared, widely repeated, and in many cases it has worked well.
But going into 2026/27, it is increasingly risky to treat remuneration as a set-and-forget decision.
Not because the salary-and-dividend approach is “wrong”, but because the tax landscape has changed in a way that reduces the benefit of rules of thumb. With dividend rates rising from April 2026, a much smaller dividend allowance than in prior years, and marginal corporation tax rates now in play, small changes in how you pay yourself can have a different outcome than you expect.
The bigger point is this: when the tax gap between two options becomes marginal, the best answer is rarely found in one lever. It comes from the wider strategy around extraction, cashflow, pensions, and what you are trying to achieve over the next few years.
What has changed and why it matters
There are three trends that are reshaping the “salary vs dividends” conversation for owner-managed businesses.
1) Dividend tax is becoming less forgiving
Dividends remain a core feature for owner managers. However, the direction of travel is clear: dividend taxation is becoming more expensive and the tax-free dividend allowance is now small (£500) compared to where it once was.
This means the old approach of taking a minimal salary and “the rest as dividends” can create a larger personal tax bill than many directors expect.
2) Corporation tax is no longer a simple flat rate for many SMEs
For smaller companies, corporation tax used to feel relatively straightforward. Now, marginal corporation tax rates mean the effective corporation tax rate depends on the level of taxable profit.
Why does that matter for remuneration? Because your salary decisions do not only affect your personal tax position. They affect the company’s taxable profit, which can change the corporation tax rate that applies.
In other words, remuneration now influences tax in two places at once: the company and you personally. When you’re an owner-manager it can emotionally feel like one total tax.
3) When the difference is small, other factors become decisive
We have modelled a range of common scenarios and one theme comes up repeatedly: in some situations the difference between dividend-heavy and salary-heavy approaches is smaller than people assume.
That should change the focus of the conversation. When the tax saving is marginal, the right choice is often driven more by cashflow, risk, flexibility, pensions, and longer-term planning than by chasing a small headline percentage.
The real shift: from “what’s the most tax-efficient split?” to “what’s the right remuneration plan?”
If you are a director-shareholder, your remuneration is not just a tax question. It is part of how you manage:
- personal cashflow and lifestyle commitments
- business resilience and working capital
- pension funding and long-term wealth planning
- future plans like buying property, bringing family into the business, or exiting
A remuneration strategy review pulls those together.
Below are the areas we recommend directors revisit before assuming last year’s approach still makes sense.
What a remuneration strategy review should cover
1) How much do you actually need to extract?
This sounds obvious, but it is often missed.
Many profitable companies do not need to extract everything that is available. Some directors are building cash for tax liabilities, working capital, investment, recruitment, or simply to reduce financial pressure.
If you do not need to take it out, your planning options widen considerably. In many cases, the most powerful decision is not “salary vs dividends”, it is “how much do we extract at all?”
2) Your wider income picture
A remuneration plan should never be built in a vacuum.
The same salary and dividend split can produce very different results depending on whether you also have:
- rental income
- savings interest
- dividends from other sources
- a spouse with income that affects household planning
- income levels that interact with key thresholds
Once you are near certain thresholds, small changes can have disproportionately large effects. This is exactly where generic rules stop working.
3) Pensions as part of the plan, not an afterthought
For many directors, pension planning is one of the most effective, legitimate ways to improve the overall tax outcome. It can also align better with long-term goals than taking more taxable income today.
The right pension approach depends on your age, existing pension position, access to cash personally, and the company’s plans. But the principle is simple: if you are only reviewing salary and dividends, you may be missing a bigger variable.
4) Cashflow and flexibility
A higher salary can feel attractive because it is simple. But salary creates fixed monthly outflows through PAYE and National Insurance.
Dividends, by contrast, allow flexibility in timing and amount, which can be valuable if profits are seasonal or uncertain. That flexibility needs discipline and good record keeping, but for many owner-managed businesses it is part of the appeal.
When the tax difference is small, the practical cashflow impact often becomes more important than the theoretical “best” answer.
5) The corporation tax position of the company
Because corporation tax can now be marginal, remuneration can change the company’s effective tax rate.
A strategy review should look at where the company sits in the corporation tax bands and how remuneration decisions move taxable profit. This is especially relevant when profit levels are rising, or when the business has one-off spikes that may not repeat.
6) Investment planning and reliefs (where suitable)
For some business owners, the bigger question is not salary vs dividends. It is how to plan for longer-term wealth building in a way that fits their risk appetite and goals.
That might include pension funding, charitable giving, or (for a smaller subset of people) structured investment relief planning such as VCTs or EIS investments. These are not suitable for everyone, and they should never be approached casually, but they are part of the wider planning picture for some high-income owner-managers and this is where a good financial planner should be involved in the conversation.
Quick indicators it is time to review your remuneration strategy
It is worth revisiting your plan if any of the following apply:
- your profits have changed materially (up or down)
- you are drawing larger dividends than in prior years
- you are building up cash in the company and unsure whether to extract it
- you have started receiving significant property or investment income personally
- you are thinking about buying property, investing, or lending funds between you and the company
- you are considering bringing family into the business or changing shareholdings
- you are thinking about succession or exit in the next three to five years
A review does not need to be complex, but it does need to be deliberate.
The takeaway
The classic “small salary plus dividends” approach still has a place. But in 2026/27 it should not be treated as an automatic default.
Dividend tax changes, a smaller dividend allowance, and marginal corporation tax mean the outcome is more sensitive to your wider circumstances than it used to be. When the tax gap between options is narrow, the best decision is usually driven by the wider remuneration plan, not a fixed split.
If you are a director-shareholder and you have not reviewed how you pay yourself in the last year, this is a sensible time to do it. Not to chase marginal savings, but to make sure your remuneration fits your business, your personal plans, and the direction of travel in the tax system.
Grasp Accountants can help you undertake this review and highlight any obvious planning opportunities or risks ahead of the new tax year.
Get in touch via [email protected]
This blog is for general information only and does not constitute professional advice. Always seek tailored advice relevant to your specific circumstances before making decisions based on this content.
