For many business owners, the "low salary, high dividend" model has been the gold standard for tax efficiency for years. However, as we enter the 2026/27 tax year, that strategy is coming under increasing pressure.
Following the latest budget changes, dividend tax rates have seen a significant jump. If you are a director-shareholder, these new rates—combined with a "stingy" frozen allowance—could mean a larger-than-expected tax bill.
At CoreAcc Accountants, we’re helping our clients re-evaluate their take-home pay to ensure they aren't losing a slice of their hard-earned profit to avoidable tax.
The New Rates: What’s Changing?
From 6 April 2026, the tax rates for dividends have increased by 2 percentage points for both basic and higher-rate taxpayers. While the additional rate remains the same, the overall tax burden for most business owners is heading upwards.
The "Allowance" Problem: Remember that the tax-free dividend allowance used to be £5,000 just a few years ago. At its current level of £500, almost every director-shareholder will find themselves paying tax on the vast majority of their dividends.
Why the Balance is Shifting
The 2% hike might sound small, but for a business owner drawing £40,000 in dividends above the allowance, that’s an extra £800 in tax every year. When you combine this with the fact that Corporation Tax remains at 25% for many, the "total tax" paid on profits before they reach your pocket is higher than it’s been in decades.
This doesn't mean dividends are "bad," but it does mean they aren't the automatic winner they used to be.
Three Strategies to Protect Your Income
At CoreAcc Accountants, we suggest reviewing three specific areas to offset the 2026 hike:
1. The Pension "Pivot"
Diverting company profit directly into a pension scheme remains one of the most powerful tax moves available. Contributions are usually a deductible expense for Corporation Tax purposes and don’t trigger a personal dividend tax charge. For many, a gross pension contribution is now significantly more "profitable" than taking the same cash as a dividend.
2. Re-balancing Salary vs. Dividends
With the gap narrowing, the "perfect" salary level may have changed. We can help you calculate whether increasing your salary slightly—perhaps to take advantage of specific National Insurance thresholds—actually leaves you with more in your pocket after all taxes are considered.
3. Spouse and Family Planning
If your spouse is a shareholder and has an unused personal allowance or sits in a lower tax bracket, ensuring your shareholding structure is optimized can save thousands. However, this must be handled carefully to stay compliant with HMRC’s "settlement" rules.
How CoreAcc Accountants Can Help
You shouldn't have to guess whether your pay structure is efficient. Our team at CoreAcc Accountants uses advanced tax modeling to show you exactly how much you’ll take home under different scenarios. We provide:
● Remuneration Reviews: We’ll calculate your "sweet spot" for salary and dividends for the 2026/27 tax year.
● Corporation Tax Integration: We ensure your personal pay strategy works in harmony with your company's tax position.
● Pension Strategy: We can work with your financial advisor to ensure your profit extraction supports your retirement goals tax-efficiently.
● Dividend Paperwork: We handle the administrative side, ensuring dividend vouchers and board minutes are legally sound and contemporaneous.
Get in Touch
Is your 2026 pay strategy ready for the hike? Reach out to CoreAcc Accountants today for a profit extraction health check.
