Dividends vs Salary vs Self Employment for 2026

Most business owners are asking the same question right now. With dividend tax rates rising again from April 2026, is the traditional limited company still worth it? Or have the Autumn Budget announcements quietly tilted the scales in favour of self employment and LLPs?

Here is the truth. The changes do make things more expensive for company owners, but they do not kill the limited company structure. In fact, for many owners, it continues to be the most tax efficient and commercially sensible option. The challenge is that you now need to be far more deliberate about how you pay yourself, how you plan your cashflow and how you structure your business for tax purposes.

If you get this wrong, you can lose thousands every year. If you get it right, you can still protect your profit, reduce the tax drag on your drawings and build long term value. That is why we have broken down the new rules, the practical implications and what owners like you should be doing right now.

Dividend rates are increasing – what does this mean?

From April 2026, dividend tax rates increase by 2 percent for both the basic and higher rate bands. The new rates will be:

• 10.75 percent for basic rate taxpayers

• 35.75 percent for higher rate taxpayers

This rise has triggered two big questions for company owners:

1. Should I now be taking salary instead of dividends?

2. Is it still tax efficient to operate as a limited company?

The short answer is yes. In most scenarios, taking a small salary combined with dividends remains more tax efficient than salary only. The gap has narrowed, but it has not closed.

Dividends vs Salary – What is actually more tax efficient? 

Here is where numbers help. Let’s compare the impact on real take home pay.

Example 1: Business owner drawing £50,000

Our calculations show that a limited company owner taking a small salary and the rest as dividends will have a net income of around £3,840 per month.

If that same owner drew the entire £50,000 as salary, their take home would be roughly £3,293 per month after Income Tax and National Insurance.

The dividend strategy still leaves the owner more than £6,500 a year better off.

Example 2: Business owner drawing £100,000

At £100,000, the benefit grows. A mixed dividend and salary approach continues to outperform salary only by more than £9,665 a year.

Why salary alone rarely wins

Even with the growing cost of dividends, the interaction between Employer NI, Employee NI and Corporation Tax means salary only is still less efficient. There are exceptions, but they tend to be specific. For example:

• The company has very low profit and cannot pay dividends

• The company benefits from reliefs such as R&D tax credits where salary improves the tax outcome

• The owner wants to maximise pension contributions using salary

For most profitable small and medium sized companies, dividends remain the better option.

Limited Companies vs Self Employment vs LLPs

Now for the bigger question. Is the limited company still the right trading structure?

Many business owners forget that dividends are paid out of post tax profit. That means the company pays Corporation Tax first, then the remaining profit is taxed again as dividend income. With dividend rates increasing, the combined tax cost can be higher than self employment in certain bands.

However, self employment brings a major drawback. It taxes all your profit, even the amounts you do not draw personally. If your business generates more profit than you need for your living costs, the tax inefficiency builds very quickly.

Here is a clearer comparison of the effective rates of tax:

Effective Tax Rates for profit extraction:

What the table shows

• If you run a business with no employees and you draw all the profit each year, self employment or an LLP may provide a lower tax bill

• If your business holds profit for working capital, investment, future growth or pension planning, a limited company is often still the smarter choice

• The ability to store profit at 25 percent inside a company is a major advantage for owners who want to build reserves or smooth income year by year

LLPs also continue to be attractive, particularly for professional services firms. We use an LLP structure ourselves because it offers flexibility, protection and planning advantages.

You must factor in Making Tax Digital 

From April 2026, self employed individuals will face quarterly digital reporting under Making Tax Digital.

Any self employed person not currently keeping digital records will need to adopt software, change processes and maintain regular bookkeeping. This is an extra layer of admin and cost that some owners have not factored in.

This is another reason why choosing the right structure for the next stage of your business matters more than ever.

Talk to us before you make any changes

The worst thing you can do is assume the headline rate increases mean you should abandon your limited company. For many owners, the company structure remains more tax efficient and more commercially suitable.

The key is making decisions based on your actual numbers, your future plans and the wider tax landscape for 2026.

We help clients forecast profit, plan drawings, model tax outcomes and set the structure that keeps more money in your pocket. If you want us to run the numbers for you, we would be very happy to help.