How to Pay Yourself in the Most Tax Efficient Way in 2026 as a Company Director
If you are a director of a limited company, how you pay yourself can significantly affect both your personal tax bill and your company’s overall tax position.
With corporation tax rates now higher than in previous years and dividend allowances reduced, tax planning in 2026 is more important than ever. At Morris Accounting Ltd, we regularly help directors structure their remuneration in the most tax efficient way based on their profits, personal circumstances and long term goals.
Here is what you need to know.
1. The Most Common Strategy: Salary and Dividends
For most owner managed companies, the most tax efficient approach remains a combination of:
A modest salary
Dividends from post corporation tax profits
Each element plays a different role in the overall tax position.
Why Not Just Take a Large Salary?
Although salary reduces the company’s corporation tax bill, it triggers:
Income tax under PAYE
Employee National Insurance
Employer’s National Insurance
In many cases, higher salaries create more tax and National Insurance overall than dividends would.
2. The Optimised Director Salary
Many directors take a salary at or around the National Insurance thresholds.
The benefits of a carefully set salary include:
Preserving entitlement to the State Pension
Using your Personal Allowance
Reducing corporation tax
Minimising National Insurance liabilities
The optimal figure depends on:
The National Insurance thresholds for 2025 to 2026
Whether your company qualifies for the Employment Allowance
Your total income position
At Morris Accounting Ltd, we calculate the most efficient salary level based on your specific situation rather than relying on a generic figure.
3. Dividends: Still Efficient, But Planning Is Key
Dividends remain attractive because:
There is no National Insurance on dividends
They are taxed at lower rates than salary
However:
The dividend allowance has been reduced
Dividend income still counts towards higher rate thresholds
Payments on account may apply
To remain tax efficient, directors should consider:
Keeping income within the basic rate band where possible
Timing dividends across tax years
Coordinating dividend payments with other personal income
4. Using a Spouse or Civil Partner
If your spouse or civil partner is a genuine shareholder, dividends can be paid to them.
This can allow you to:
Use two Personal Allowances
Use two dividend allowances
Keep more income within lower tax bands
However, shares must be properly structured and documented. Incorrect arrangements can create tax risks. We always recommend taking advice before restructuring shareholdings.
5. Pension Contributions: One of the Most Tax Efficient Options
Employer pension contributions are often overlooked but can be extremely tax efficient.
Advantages include:
Corporation tax relief for the company
No income tax personally at the time of contribution
No National Insurance
Tax efficient investment growth
For many directors, pensions are one of the most powerful long term tax planning tools available.
6. Directors’ Loan Accounts
If you have previously lent money to your company, you can withdraw repayments tax free.
However, if you overdraw your director’s loan account, tax charges can arise if the balance is not repaid within the required timeframe.
Director loan accounts should be monitored carefully to avoid unexpected Section 455 tax charges.
7. Retaining Profits in the Company
Sometimes the most tax efficient option is not extracting profits immediately.
Leaving funds within the company may be beneficial if:
You plan to reinvest
You are approaching higher rate tax thresholds
You are considering future business expansion
You are planning an eventual business sale
Extraction strategy should align with your long term objectives.
8. Watch the Wider Tax Picture
When planning how to pay yourself in 2026, you must consider:
Corporation tax rates
Dividend tax rates
National Insurance thresholds
Student loan repayments
Child Benefit High Income Charge
Personal Allowance taper above £100,000
A tax efficient strategy looks at your total position, not just one element in isolation.
A Tailored Approach for Every Director
There is no one size fits all answer. The most tax efficient way to pay yourself depends on:
Company profit levels
Your other income
Family circumstances
Pension planning
Future business goals
At Morris Accounting Ltd, we provide personalised remuneration planning for company directors, including:
Optimal salary calculations
Dividend strategy planning
Corporation tax impact analysis
Personal tax projections
Payments on account forecasting
If you would like a tailored breakdown showing the most tax efficient way to pay yourself in 2026, contact Morris Accounting Ltd today and we will be happy to help you plan ahead with confidence.
