The £12,570 salary, paired with dividends for the rest, has been the default advice for UK company directors for the better part of a decade. It is still cited everywhere as the answer. What is rarely pointed out is that the gap it was designed to exploit has been narrowing every year since 2022, and on 6 April 2026 it narrowed again. Dividend tax rates have now risen in back-to-back tax years, the dividend allowance has been cut four times in succession, and for a meaningful band of sole-director companies, the long-standing advantage of incorporating over trading as a sole trader has quietly flipped. None of this means the standard advice is wrong. It means the advice has an expiry date that most directors are not tracking.
Dividend tax went up again. This is the second consecutive increase, not a one-off
From 6 April 2026, dividend tax rates rose by a further 2 percentage points across all three bands: the basic rate moved from 8.75% to 10.75%, the higher rate from 33.75% to 35.75%, and the additional rate from 39.35% to 39.35% remaining at the same level relative to prior structural changes. The dividend allowance, the amount of dividend income taxed at 0% before any rate applies, remains frozen at £500, having been cut from £2,000 in 2022/23 down through £1,000 and then £500, where it has now sat unchanged for three consecutive tax years.
What makes this worth tracking as a trend rather than a single adjustment is the direction and consistency of travel. Every change to dividend taxation since 2022 has moved in the same direction: higher effective rates, a smaller tax-free allowance, applied without exception to every limited company director extracting profit this way. There is no indication in the current fiscal trajectory that this reverses. A director who set their extraction strategy in 2021 and has not revisited it since is very likely paying meaningfully more tax than necessary, or structuring their pay in a way that made sense under a tax regime that no longer exists.
From 8.75% to 10.75%, the second consecutive annual increase. The higher rate moved from 33.75% to 35.75%. Combined with a dividend allowance that has fallen 75% since 2022/23, every pound of dividend income above £500 is taxed more heavily than at any point since dividend tax was introduced in its current form.
1Office UK advises on director remuneration structure as part of the annual accounting service.
The £12,570 salary still works. The sole-trader comparison underneath it does not, for everyone
The recommendation to take a salary at £12,570, the Personal Allowance and NIC Primary Threshold, paired with dividends for the remainder, remains broadly sound as the standard structure for most director-shareholders. Salary at this level costs no income tax and no employee National Insurance, while still qualifying as a deductible business expense that reduces Corporation Tax. That part of the calculation has not materially changed.
What has changed is the comparison that originally justified incorporating in the first place. For a sole director with no other employees, unable to claim the Employment Allowance, the rising dividend tax rate combined with the frozen allowance has pushed the crossover point, the profit level at which a limited company stops being more tax-efficient than simply trading as a sole trader, down to somewhere in the region of £26,000 of company profit for the 2026/27 tax year. Below that threshold, current analysis suggests a sole trader structure can now produce a higher net take-home than an equivalent limited company, once the administrative cost difference is set aside.
This was unambiguously true for most of the 2010s. It is now conditional on profit level and headcount. A single-director consultancy with modest profit and no plans to hire is in a genuinely different tax position to an identical company with one additional employee earning above the Secondary Threshold, because that second employee unlocks the £10,500 Employment Allowance and removes employer National Insurance from the director's salary entirely, restoring much of the limited company's advantage at higher profit levels.
The practical implication is that "should I incorporate" and "should I keep my limited company structure" are now genuinely numerical questions tied to current profit and staffing, not settled answers that hold indefinitely once decided. A structure that was correct in 2022 is not automatically correct in 2026, and will not automatically remain correct in 2027 if dividend rates move again.
"The standard director pay advice has not been wrong. It has been quietly losing the margin that made it obviously correct. For directors below the crossover profit level, that margin may now be gone entirely."
Three decisions worth revisiting given where the numbers sit in 2026/27
1. Whether your current salary level still earns its keep
A salary at the £12,570 Personal Allowance level generates Corporation Tax relief worth up to 25p in the pound for companies on the main rate, against an employer National Insurance cost of around 15% on the portion above the £5,000 secondary threshold. For most companies this nets out in favour of the £12,570 figure over the lower £6,708 Lower Earnings Limit alternative, but the margin is a few hundred pounds a year, not a clear-cut win, and it shifts depending on whether the small profits rate or the main rate of Corporation Tax applies to the company.
2. Whether dividend timing across tax years is being used deliberately
Dividends are declared when the company chooses to declare them, not on a fixed schedule. With rates now meaningfully higher than three years ago, the value of spreading dividend extraction across tax years to stay within the basic rate band, rather than taking a single large distribution that pushes into higher-rate territory, has increased. This is a planning lever that costs nothing to use and is frequently left unused simply because nobody revisited the strategy after the rate changed.
3. Whether an employer pension contribution now beats further salary or dividends
For directors with profit above the level needed for personal living costs, an employer pension contribution avoids both the dividend tax increase and employer National Insurance entirely, since pension contributions are a deductible business expense that never passes through personal income at all. As dividend rates rise and the personal allowance taper continues to bite at higher income levels, the relative attractiveness of this route, often overlooked in favour of the simpler salary-and-dividends conversation, has increased correspondingly.
None of the rates above are unusual or hidden. They are published HMRC figures that any UK director or accountant can look up. What is easy to miss is the compounding direction: four consecutive cuts to the dividend allowance, two consecutive increases to the dividend rate, and a sole-trader crossover point that has moved materially since the structure most directors are still using was first recommended to them.
1Office UK reviews director remuneration structure as part of the annual accounting service, so the salary and dividend split is reassessed against current thresholds rather than carried forward unchanged year after year.
1Office UK handles annual accounts, Corporation Tax, payroll, and director remuneration planning for UK limited companies.
Sources and references: HM Revenue and Customs, Rates and Thresholds for Employers 2026 to 2027; HMRC Dividend Allowance factsheet; HMRC Income Tax rates and Personal Allowances guidance; published 2026/27 director remuneration analyses from UK chartered accountancy practices, cross-checked against HMRC published thresholds as of April 2026.
