Choosing how to pay yourself from your company is always important, but changes coming in from April 2026 make it even more significant. This guide runs through the main options for owner-managed companies, what’s changing, and some practical steps to consider before the new rules take effect. 

Why your 2026 pay strategy matters

The usual balancing act between salary, dividends and pension contributions still applies, but the numbers are shifting again from 6 April 2026. Lower allowances on dividends and tighter rules around company tax relief mean there is less room for inefficiency in how you draw funds. Getting this right can reduce the overall tax and National Insurance (NI) cost for you and your company, while still protecting your state pension record and other entitlements.

The building blocks: salary, dividends and pensions

Most owner-directors will use a mix of these three options to take money out of their company:

• Salary: deductible for corporation tax, but subject to income tax and NI once above the relevant thresholds. 
• Dividends: paid from post‑tax profits, with no employer NI and lower income tax rates than salary, but now with a much smaller tax‑free dividend allowance.
• Pension contributions: usually paid by the company as an allowable expense (within limits), so no income tax or NI for you when paid in, but funds are locked away until at least age 55–57 depending on your circumstances.

The ideal combination for each Director will depend on profit levels, other income, age, and their plans for the business over the next few years, so there is no ‘one size fits all’ solution!

Salary: how much and why?

For many directors, a modest salary remains the starting point of any pay strategy. The idea is usually to:

• Keep your salary at a level that gives you a qualifying year for state pension, by going above the lower earnings limit.
• Avoid or minimise both employee and employer NI where possible, particularly if you are not using allowances such as the Employment Allowance.
• Still secure corporation tax relief for the salary paid, where the salary remains commercially justifiable.

From April 2026, the interaction between salary levels and the corporation tax relief the company can claim is expected to tighten further, particularly where ‘low’ salaries are being used mainly for tax planning. Some recent commentary suggests that HMRC may start to  challenge arrangements where salaries are set purely to exceed NI thresholds rather than reflect commercial reality.

Practical steps before April 2026:

• Review director salaries now against the 2025/26 thresholds and your 2026/27 projections, rather than waiting until the new tax year starts.
• Check whether you are currently using the Employment Allowance (if eligible) and how that affects the NI cost of different salary levels.
• Consider whether your salary levels still feel defensible in terms of the work done and hours committed.

Dividends: still attractive, but less generous

Dividends remain central for many owner‑managed businesses because they avoid employer NI and are taxed at specific dividend rates, rather than the higher income tax rates on salary. However, that difference has been eroded by successive cuts to the dividend allowance.

• For 2025/26, the dividend allowance is just £500.
• Dividend income above that allowance is taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate.

This means more of your dividends will be taxable, even at relatively modest levels. The allowance cannot be transferred to a spouse, but you could consider sharing ownership of the company to spread dividends across two sets of income tax bands.

Practical steps before April 2026:

• Estimate your likely dividends for 2026/27 and map them into the income tax bands so you can see where higher rates may kick in.
• If your spouse or civil partner is involved in the business, review whether the current shareholding splits income efficiently between you.
• Avoid paying ‘catch‑up’ dividends at year‑end without knowing the profit position, to reduce the risk of illegal dividends and later HMRC scrutiny.

Pensions: using the company to fund your future

Company pension contributions can still be one of the most tax‑efficient ways to extract value from your business, particularly if you do not need all the cash personally right now. A pension contribution paid by the company is usually: 

• Treated as an allowable business expense (subject to ‘wholly and exclusively’ and overall remuneration being reasonable). 
• Free of income tax and NI when it is paid into the pension. 
• Growing tax‑free inside the pension wrapper until you draw benefits. 

Annual allowance limits (and, for some higher earners, tapering rules) still apply, so it is important not to exceed what you can contribute tax‑efficiently. From a planning point of view, pensions are particularly powerful where your company is paying corporation tax at the main rate and you are personally moving into higher or additional rates of income tax.

Practical steps before April 2026:

• Check your pension funding over the last three years to see what unused annual allowance might still be available to carry forward. 
• Factor pension contributions into your profit forecasts, not as an afterthought once accounts are prepared. 
• Align pension planning with your wider exit or succession plans; for example, building a pension pot can be part of your long‑term extraction strategy. 

Other ways to take value out

While salary, dividends and pensions are the main routes, there are other, often more targeted, ways to draw value. 

• Benefits in kind: company‑paid benefits (for example, certain electric company cars, mobile phones or health benefits) can still be tax‑efficient in the right circumstances, but you need to factor in benefit in kind charges and reporting via P11D or payroll.
• Rent for home office use: where appropriate, the company may pay you rent for business use of part of your home, provided the arrangement is properly documented and the level of rent is justifiable. 
• Director’s loan account: keeping proper records of funds introduced or withdrawn is essential; overdrawn loan accounts can trigger extra tax charges if not cleared within set time limits.

Each of these routes comes with its own rules and paperwork, so they should be considered as part of a package, rather than in isolation.

Pulling it together: what to review this year

With 6 April 2026 approaching, this is a good time to review your pay strategy in full, not just tweak one figure. 

• Map your personal income: list your expected salary, dividends, rental income and anything else for 2025/26 and 2026/27 so you can see where you sit in the bands.
• Check the company corporation tax position: understand whether you are in the small profits rate, main rate or somewhere in between, and how that affects the value of deductions like salary and pensions.
• Revisit your goals: decide whether the priority this year is maximising net take‑home pay, building longer‑term wealth (for example, via pensions), or retaining profits in the business for growth.

Once you have a clearer picture, you can adjust the mix of salary, dividends, pensions and other benefits to better fit both the current rules and your own plans.

Next steps…

If you’re unsure whether your current approach will still be right from April 2026, or you would like to chat through your updated pay strategy, please get in touch with us to talk through the options, as they apply to you, in more detail.