Paying yourself tax-efficiently as a practice owner

If you own your practice through a limited company, you decide how the money reaches you — and that decision is worth real money. Most owners inherited a salary-and-dividend split from an accountant years ago and have not revisited it since. This April is a bad year not to revisit it, because the arithmetic moved.

A caveat first, and I mean it rather than saying it: this is how the rules work, not what you should do. The right answer depends on your other income, your co-owners, your pension, your mortgage, whether your spouse is a shareholder, and whether you are trying to extract cash or build value. Read this, then have a specific conversation with your accountant.

Why a company changes the question

Profits in a limited company belong to the company, not you. Corporation tax is charged first: 19% on profits up to £50,000, 25% above £250,000, with marginal relief tapering between the two. What is left can reach you three ways — salary, dividends, or employer pension contributions — and they are taxed on entirely different principles.

• Salary is a cost to the company, so it reduces the profit that corporation tax is charged on. But it attracts employee National Insurance, and employer National Insurance at 15% on everything above £5,000.
• Dividends are paid out of profit after corporation tax, so they get no deduction. But they carry no National Insurance at all, and are taxed at lower rates than salary.
• Employer pension contributions are a company cost like salary, so they reduce corporation tax — and unlike salary they carry no National Insurance whatsoever. They are also the least flexible, because you cannot spend them until you can access the pension.

The classic salary-plus-dividend split exists because it uses each of these where it is cheapest: enough salary to use up allowances and reliefs that would otherwise be wasted, then dividends for the rest.

What changed in April 2026

Dividend tax rates rose by two percentage points. For 2026/27:

The dividend allowance stays at £500 — the first £500 of dividends is taxed at nil. It was £2,000 not many years ago, which tells you the direction of travel.

The practical effect is a narrowing. Dividends are still taxed more lightly than salary, but by less than they used to be, and the gap has been closing for several years running. If your split was optimised against the old rates and never revisited, it is now slightly wrong — and the pension route has quietly become more attractive relative to both.

The shape of a typical split

The usual approach is a modest salary plus dividends, and the argument is about where "modest" sits.

Salary up to the £5,000 secondary threshold. No employer NI at all. Very clean. The problem is that it may be too low to earn you a qualifying year towards the state pension, which needs earnings at or above the lower earnings limit — check the current figure, and check your National Insurance record on GOV.UK before assuming you have the years you need. Missing years are expensive to buy back later.

Salary up to the £12,570 personal allowance. This is the common choice. It uses the personal allowance in full, keeps you clear of employee NI (which starts at the same £12,570), and the whole salary is deductible against corporation tax. The cost is employer NI at 15% on the £7,570 above the secondary threshold — around £1,136 a year.

Whether that £1,136 is worth paying turns almost entirely on Employment Allowance, which is £10,500 for 2026/27 and reduces your employer NI bill. If you can claim it, the employer NI on a £12,570 salary disappears and the higher salary is clearly better.

The trap is the eligibility rule: you cannot claim Employment Allowance if the only person on the payroll is a single director. Most practices employ nurses, receptionists and associates, so this usually is not a problem — but if you are a one-person company with everyone else self-employed or contracted, it applies to you, and the arithmetic flips.

Anything above that, as dividends — provided the company has the distributable reserves to pay them, which matters more than people think. See below.

Do not forget the pension

Employer pension contributions are the most under-used route out of a profitable practice. The company gets a corporation tax deduction, there is no employee NI, no employer NI and no dividend tax. Nothing else in the list does all four.

The constraints are real: annual allowance limits how much can go in each year, the allowance tapers for high earners, and the money is locked until pension access age. But if you are already taking more than you spend and paying higher-rate dividend tax on the surplus, contributing that surplus to a pension instead is often the single largest saving available — and it got larger this April.

The traps that cost more than the tax

Taking dividends the company cannot legally pay. A dividend must come from accumulated distributable profits, not from cash in the bank. Those are different numbers, and in a practice with equipment finance or a big VAT bill they can be very different. A dividend paid without reserves is unlawful and can be reclassified — typically as salary, with backdated PAYE and NI, or as a director's loan.

The director's loan account. If you draw money that is neither salary nor a lawful dividend, it is a loan from your company. Leave it outstanding more than nine months after the year end and the company pays a temporary corporation tax charge on the balance, at a rate matched to the higher dividend rate — refundable, eventually, but a genuine cash-flow event at exactly the wrong moment. Overdrawn loan accounts are one of the most common findings in small company accounts and one of the most avoidable.

Optimising yourself out of a mortgage. A very low salary and modest dividends can look excellent on a tax return and poor to a lender, who may look at two or three years of history. If you plan to borrow — for premises especially — start the conversation with a broker well before you need the money, not after you have spent three years minimising declared income.

Forgetting the rest of your income. Dividend rates apply on top of your other income, so the band you land in depends on everything: salary, property income, a spouse's arrangements, interest. And a total income above £100,000 tapers away the personal allowance, producing an effective marginal rate far higher than the headline. If you are near £100,000, that boundary is worth planning around deliberately.

Multiple companies. If you own more than one, corporation tax thresholds and Employment Allowance are shared between associated companies, not multiplied by them.

The point

Getting the split right is worth having. Getting it right is also, in the end, a one-off gain of a few thousand pounds that you then keep — it does not compound, and it does not change what the practice earns.

The cost base does compound. A supplier price that is 20% too high is 20% too high every month, for as long as nobody looks, and it grows with your turnover. I would take the tax conversation seriously — but I would not let it be the only financial hour you spend on the practice this year, because the cost base is where the larger number usually is.

That is the half we can help with directly. SupplyIndex negotiates supplier rates on behalf of many independent practices at once, so you buy at group pricing while staying entirely independent — free to members, because suppliers pay us rather than you.