Introduction
One of the most common tax planning questions for business owners is how to structure remuneration efficiently. The balance between salary and dividends remains a key area of planning for directors of owner-managed businesses.
However, the "optimal mix" is not static — it changes with tax rates, thresholds, and personal circumstances.
Why the mix matters
Choosing the right balance between salary and dividends affects:
- Income tax liability
- National Insurance Contributions (NICs)
- Pension contributions
- Cashflow within the business
- Long-term tax efficiency
Salary vs dividends: the fundamentals
Salary is tax-deductible for the company, subject to income tax and NICs, and supports state pension contributions. Dividends are paid from post-tax profits, are not subject to NICs, and are often more tax-efficient at higher income levels.
Key considerations for 2026/27
For 2026/27, business owners should reassess:
- Changes in dividend allowances
- NIC thresholds and rates
- Corporation tax bands
- Personal income levels and tax bands
The "right mix" depends heavily on overall earnings and company structure.
Typical planning approach
A common approach involves:
- Paying a tax-efficient salary (often around NIC thresholds)
- Extracting additional profits via dividends
- Reviewing annually based on profit levels and tax changes
However, this should always be tailored.
Common mistakes we see
- Taking excessive salary and triggering unnecessary NICs
- Ignoring pension planning opportunities
- Not aligning remuneration with cashflow planning
- Treating dividend planning as a static annual decision
How LMJ Group helps
We support clients with:
- Salary vs dividend modelling
- Tax-efficient remuneration strategies
- Integration with cashflow forecasts
- Long-term tax planning aligned to business growth
Conclusion
The optimal salary and dividend mix is not a fixed formula — it is a dynamic planning decision. Businesses that actively review their structure each year are significantly better positioned to manage tax efficiency and cashflow.