As in previous years, we’ve set out what we believe to be the most efficient salary for contractors and freelancers. The below are suggestions for the 26/27 tax year (starting from 6th April 2026) and engagements that fall outside IR35.
Dividend Tax rates: what’s changed
The big change for 2026/27 is that dividend tax rates have increased by 2% for both basic and higher rate taxpayers. The basic rate has gone from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate stays the same at 39.35%.
In real terms, if you’re drawing the typical salary and dividends up to the basic rate threshold, this means roughly £744 more in personal tax compared to last year. If you’re drawing enough to straddle the higher rate band as well, the extra cost is closer to £1,739. It’s not dramatic, but it’s worth knowing about when planning your drawings for the year.
The ‘most common’ situation
Generally speaking, and despite the changes in NI thresholds during the 2024/25 tax year, in 2026/27 we recommend a salary of £1,047/month (as per 2025/26). It is the maximum before employee NIC become payable, yet it is still sufficient in contributing towards the basic State Pension. The recommended amount, however, will attract employer NI, unless this is covered by the Employment Allowance (see more below).
HMRC will expect you to make employers’ PAYE payments a few times per year. Whilst paying this will be a small extra hassle, as a Maslins client, we will be in touch to remind you to make payment before the due date.
Based on the salary mentioned above (£12,564 for the year) and no other personal income, you can take dividends of:
- £506 and suffer no personal tax (0%)
- £37,706 (i.e. an extra £37,200) and suffer £3,999 personal tax (£37,200 at 10.75%)
- £87,436 (i.e. an extra £49,730) and suffer £21,777.48 personal tax (the above £3,999, plus £49,730 at 35.75%)
The above thresholds are not hard limits, just the levels above which the marginal rate of tax increases (i.e. the amount of tax suffered on each extra £ of dividends taken). The effective tax rate becomes increasingly penal on total earnings above £100k, at which point you will start to lose your personal allowance.
Whilst there will be instances where bespoke salary amounts for two-employee businesses would be more efficient, we will stick with the recommended monthly amount of £1,047 each. However, if your company profits are £150k+ for both the previous and coming 12 months, please get in touch, and we’ll be able to advise further.
Other changes and useful information
Employment Allowance – companies with 2+ staff won’t have any employer NICs to pay, as they will qualify for the Employment Allowance. Effectively, if your company has 2+ staff, the first £10,500 of employer NICs will be covered by the allowance.
Student Loan/High Income Child Benefit Charge – these aren’t really exceptions as such, but factors to be aware of that can increase what you must pay.
If you have an outstanding student loan or claim Child Benefit, and your total overall income is above the thresholds, then there will be additional charges in respect of loan repayments and/or having Child Benefit clawed back.
For the student loans, it depends on the plan:
- Plan 1 – £26,900 (9% on earnings above this)
- Plan 2 – £29,385 (9% on earnings above this)
- Plan 4 – £33,795 (9% on earnings above this)
- Plan 5 – £25,000 (9% on earnings above this)
- Postgraduate Loan – £21,000 (6% on earnings above this)
For the High Income Child Benefit Charge, if you or your partner earns over £60,000, the charge claws back 1% of the total Child Benefit received for every £200 of income above that threshold. Once income reaches £80,000, the full amount is clawed back. For example, if your adjusted net income is £70,000, that’s £10,000 over the threshold, which is 50 x £200, meaning 50% of the Child Benefit is repaid through your tax return. It’s also worth remembering that personal pension contributions (from your own after tax money) reduce your adjusted net income, so in some cases a well timed pension top up can take you back below the threshold entirely.
Income thresholds: No need to panic
The general logic isn’t surprising. In most situations, as personal income goes up, the tax rate goes up.
Also, don’t be concerned about possibly dribbling just above a threshold. For example, if you went £10 into the higher rate band, it just means that the top £10 of your income would suffer 35.75% tax instead of 10.75% on your dividends. There’s no sudden sting for going pennies above a threshold.
