From 6 April 2026 dividend tax rates for both basic rate and higher rate taxpayers rise by two percentage points. For director shareholders of owner managed limited companies, where dividends are the primary vehicle for extracting profit, this is the most directly relevant tax change of the year.
The increase sounds modest. Two percentage points rarely generates headlines. But for a director taking £60,000 of dividends from their company each year, the rise costs an additional £1,200 per year — permanently, for as long as the rates remain at the new levels. And the cumulative impact of the changes to dividend taxation over the past decade — the allowance cut from £5,000 to £500, the successive rate increases — means that what was once the most obvious tax planning decision for a company director now requires careful annual review to remain optimal.
At CoreAcc Accountants, we model profit extraction strategies for director shareholders across Hertfordshire and North London as part of our year end tax planning service. This article sets out the full picture: what the new rates cost, how the optimal strategy changes, and the specific tools available to reduce the impact.
Disclaimer: This article is for general information only and does not constitute professional tax advice. The correct extraction strategy depends on your individual circumstances. Always seek specific advice before making changes to your remuneration arrangements.
1. The New Rates and What They Mean
Dividend tax rates from 6 April 2026 are as follows. The basic rate — applying to dividend income falling within the basic rate band, broadly where total income is between £12,570 and £50,270 — rises from 8.75% to 10.75%. The higher rate — applying where total income is between £50,270 and £125,140 — rises from 33.75% to 35.75%. The additional rate — applying above £125,140 — remains unchanged at 39.35%.
The annual dividend allowance — the amount of dividend income that can be received each year free of dividend tax — remains at £500. This figure was £5,000 in 2017, fell to £2,000 in 2018, and has since been reduced to its current negligible level. Almost every director shareholder receiving regular dividends will find that the entire amount above £500 is now taxable at the applicable rate.
To put the two percentage point increase in context, the cumulative erosion of the dividend tax position since 2017 is substantial. A higher rate taxpaying director who in 2017 received £50,000 in dividends paid dividend tax of approximately £13,050 — benefiting from the £5,000 allowance and the then higher rate of 32.5%. The same director in 2026/27 pays dividend tax on the full amount above £500 at 35.75%, a liability of approximately £17,693. The change in the tax cost over nine years is approximately £4,643 per year — equivalent to a 35.6% increase in the annual dividend tax bill on the same income, driven by a succession of allowance cuts and rate increases.
2. The Total Tax Picture on Company Profits
Understanding why dividends remain worthwhile — despite rising rates — requires looking at the total effective tax rate on company profits from generation to the point at which they reach the director personally, and comparing it to the alternative of paying a salary.
When a company generates £100 of trading profit:
At the 25% Corporation Tax rate, the company pays £25 in CT, leaving £75 available for distribution as a dividend.
If the director is a higher rate taxpayer receiving that £75 as a dividend, dividend tax at 35.75% on £75 is approximately £26.81. Total tax on the original £100 of profit: £25 plus £26.81 = £51.81. Net to the director: £48.19.
If the same £100 were paid as a salary instead, the company saves Corporation Tax on the salary (£25 saving), but the director pays Income Tax at 40% (£40) and employee National Insurance at 2% above £50,270 (approximately £2) — a combined personal tax charge of £42. The company also pays employer NI at 15% on the salary (£15), which is deductible but represents a real cost. Total tax on the salary route: the CT saving of £25 is offset by the employer NI cost of £15 (net saving £10), plus the personal tax of £42 — an effective total tax extraction of approximately £47. Net to the director: approximately £53.
At first glance, the salary route appears slightly more efficient than the dividend route at the higher rate — but this assumes the director can take a full £100 as salary, which pushes the income further into the higher rate band and may trigger additional issues. In practice, the optimal strategy is a combination of salary at the personal allowance threshold, pension contributions, and dividends timed to stay within the basic rate band — not a wholesale switch to salary.
3. The Optimal Salary for 2026/27
For the vast majority of director shareholders whose company employs only themselves and cannot claim the Employment Allowance, the optimal director salary for 2026/27 remains £12,570 — the personal allowance threshold.
At this salary level, no income tax is payable. No employee National Insurance is payable. The company pays employer NI at 15% only on the amount above the £5,000 secondary threshold — approximately £1,136 per year. The salary is fully deductible against the company's Corporation Tax. The effective cost of the salary to the company after CT relief is approximately £12,570 plus £1,136 employer NI minus £3,427 CT saving (at 25%) = approximately £10,279 net cost to fund a £12,570 salary in the director's hands.
Whether to take a salary above the personal allowance — triggering income tax — depends on the specific profit level of the company and whether it is trading at a level where the marginal CT rate differs from the personal income tax rate. For most directors in the 40% tax band drawing salary beyond the personal allowance, doing so is not efficient. The income tax cost exceeds the CT saving.
For companies where the director is also an employee alongside other staff, and where the company can claim the Employment Allowance of £10,500, the calculation shifts. The Employment Allowance covers the employer NI on a salary above the threshold — effectively allowing a higher salary to be paid without employer NI cost, making a salary closer to the basic rate threshold more efficient for the company.
4. The Power of Pension Contributions After the Dividend Rise
The two percentage point dividend tax rise makes the employer pension contribution even more powerful relative to dividend extraction than it was in 2025/26. This is the single most important planning change that directors should review in response to the April 2026 rates.
An employer pension contribution from the company:
Reduces the company's Corporation Tax liability — the contribution is deductible against taxable profit, saving 19% or 25% in CT depending on the company's profit level.
Does not attract income tax or National Insurance in the hands of the director at the point of contribution.
Does not use the director's annual ISA allowance or interact with the personal allowance taper.
Grows entirely free of tax inside the pension wrapper.
Is accessible from age 57 (rising to 58 in 2028), with 25% available as a tax free lump sum and the remainder taxable as income in retirement.
Crucially, the pension contribution does not count as personal income. Where the director's salary plus dividends would otherwise exceed £100,000 — triggering the personal allowance taper and creating a 60% effective marginal rate on income between £100,000 and £125,140 — an employer pension contribution reduces the company's profit and therefore the dividends available for distribution, without itself adding to personal income.
The two percentage point rise in dividend tax from April 2026 means that the breakeven point at which a pension contribution becomes more efficient than a dividend has shifted. At 2025/26 rates, a higher rate taxpayer making a pension contribution was saving 33.75% dividend tax (on the dividend forgone) and gaining CT relief at 25% — a net advantage of 8.75 percentage points. At 2026/27 rates, the saving on dividend tax forgone is 35.75%, the CT relief is unchanged at 25%, and the net advantage of the pension route has increased to 10.75 percentage points. The new rates make the pension contribution more compelling, not less.
5. The 60% Tax Trap and How Dividend Timing Avoids It
The personal allowance taper is one of the most damaging features of the UK income tax system for directors with higher incomes, and it is one that dividends can help manage — but only if they are planned carefully.
Where total personal income exceeds £100,000, the £12,570 personal allowance is reduced by £1 for every £2 of income above that threshold. At £125,140, the allowance reaches zero. Within the £100,000 to £125,140 band, the effective marginal rate is therefore 60% — the 40% income tax on the additional pound of income, plus the 40% tax on the 50 pence of lost personal allowance.
A director who takes a salary of £12,570 and needs to decide how much in dividends to extract has a clear planning priority: keep total income at or below £100,000 to avoid the taper entirely.
Where the company generates more profit than can be efficiently extracted at £100,000 per year, the surplus should be retained in the company rather than being pushed through the 60% effective rate band. Retained company profits are subject to Corporation Tax at 19% or 25% — a significantly lower rate than 60% — and can be extracted in future years when personal income is lower. This strategy of profit smoothing across tax years is one of the most consistently underused planning tools available to owner managed companies.
Worked Example 1: The Cost of Ignoring the Taper
James is the sole director of a consulting company with profits of £140,000. He pays himself a salary of £12,570 and takes the remaining profit as dividends. His total personal income is £140,000.
The portion of his dividend income between £100,000 and £125,140 — approximately £25,140 — is subject to a 60% effective marginal rate. The dividend tax on that band is 35.75% on the income, plus 35.75% on the lost personal allowance income of £12,570 (grossed up). In simplified terms, the effective 60% rate means the tax on that £25,140 is approximately £15,084 — compared to approximately £8,988 at the standard 35.75% rate.
The excess tax cost of allowing income into the taper band is approximately £6,096 per year — money that could have been retained in the company at 25% CT or contributed to a pension where it would have grown free of tax.
Worked Example 2: The Optimal Extraction at £80,000 Company Profit
Sarah runs a marketing agency. In 2026/27, her company generates £80,000 of profit. She is a sole director with no other income.
She pays herself a salary of £12,570. After salary and employer NI of £1,136, taxable company profit is approximately £66,294. She makes an employer pension contribution of £10,000, reducing taxable company profit further to £56,294. CT at approximately 25% (marginal relief) is £9,574. Net available for dividends: £46,720.
Her personal income: £12,570 salary plus £46,720 dividends = £59,290. Total income remains within the basic rate band. Dividend tax: first £500 at 0%, remaining £46,220 at 10.75% = £4,969.
Total tax including CT: £9,574 CT plus £4,969 dividend tax = £14,543. Net to Sarah (cash plus £10,000 pension): approximately £75,457.
Without the pension contribution and extracting everything as dividends, total income would have been £66,864, pushing some income into the higher rate band at 35.75% and increasing the total tax burden. The pension contribution not only builds retirement savings but materially reduces the combined tax cost.
Worked Example 3: The 2026 Dividend Rise in Real Numbers
Priya is a higher rate taxpaying director who draws £60,000 of dividends per year. Her other income uses the full personal allowance and basic rate band.
At 2025/26 higher rate of 33.75%: dividend tax on £59,500 (above the £500 allowance) = £20,081.
At 2026/27 higher rate of 35.75%: dividend tax on £59,500 = £21,271.
The two percentage point rise costs Priya an additional £1,190 per year. Over ten years, at unchanged income levels, she pays £11,900 more in dividend tax than she would have under the 2025/26 rates — for the same income, from the same business.
This is money that would produce a better outcome if diverted to an employer pension contribution before it reaches her hands. A pension contribution of £1,190 per year saves CT at 25% (£298), avoids the £1,190 of additional dividend tax, and grows in the pension — a combined benefit relative to the alternative of paying the extra dividend tax of over £1,488 per year.
6. Spousal Income Splitting: The Relief That Requires Care
Where a spouse or civil partner holds shares in the company and has unused personal allowance, basic rate band, or a lower tax position than the director, directing dividends to that spouse rather than the director can materially reduce the combined household dividend tax bill.
A spouse with no employment income with no other income can receive up to £13,070 in dividends in 2026/27 entirely free of tax — the £12,570 personal allowance plus the £500 dividend allowance. A spouse who works but remains in the basic rate band pays dividend tax at 10.75% on dividends received rather than the director's rate of 35.75%. The saving on a £20,000 dividend is the difference between 10.75% and 35.75%, which is 25% — a saving of £5,000.
This strategy is entirely legitimate where the spouse holds shares with genuine economic substance and the dividend is a real return on that shareholding. It becomes problematic where the arrangement is a device to pass income from the director to the spouse purely for tax purposes — what HMRC calls a "settlement" — without the spouse having any genuine economic risk or benefit from the shareholding.
The settlement provisions in section 620 of the Income Tax (Trading and Other Income) Act 2005 can apply to redirect the income back to the director if the arrangement lacks commercial substance. The boundary between a legitimate spousal shareholding and a settlement is not always obvious. Key indicators of a legitimate arrangement include the spouse having held the shares from the outset of the company or having acquired them for genuine consideration, both spouses being genuinely involved in the business, and the dividend rate not having been manipulated to achieve a tax outcome that has no commercial rationale.
Where alphabet shares — different classes of share with different dividend rights — are used to allow differential dividend payments to different shareholders, HMRC's scrutiny is particularly focused on whether the differentiation is driven by tax avoidance rather than commercial considerations.
CoreAcc Accountants can review your existing shareholder structure and advise on whether the current arrangement is defensible or whether adjustments are needed to reduce the settlement risk.
7. Alternative Extraction Routes Worth Considering
Salary sacrifice for electric vehicles
Where the director or other employees would benefit from a company vehicle, an electric vehicle on a salary sacrifice or company car arrangement remains one of the most tax efficient benefits available. The benefit in kind rate for a zero emission vehicle in 2026/27 is just 3% of the list price — meaning a £40,000 electric car creates a taxable benefit of only £1,200 per year. The income tax on that benefit at 40% is £480 — less than most people pay in fuel costs. Meanwhile, the company deducts the full cost of the lease or purchase, and salary sacrifice reduces the director's gross pay, lowering the NI cost to both director and company.
Director's loan
A director's loan — drawing money from the company beyond salary and dividends, treated as a loan from the company to the director — is not a tax free extraction mechanism. A loan above £10,000 creates a benefit in kind on the interest saving, and an overdrawn director's loan not repaid within nine months of the year end triggers the Section 455 charge at 33.75%. However, a director's loan can be a useful short term liquidity tool where the director needs cash before the company's year end but the profit and available distributable reserves have not yet been confirmed for dividend purposes. It should always be a temporary measure, not a permanent extraction strategy.
Retained profits and future planning
The combination of rising dividend taxes and the 60% taper means that retaining profits in the company — paying CT at 19% or 25% and deferring personal extraction — is increasingly attractive relative to extracting everything annually. Retained profits can be invested within the company, used to fund future employer pension contributions, or extracted in future years at a lower personal rate. The company becomes a vehicle not just for trading but for accumulating wealth in a tax efficient structure.
8. The New Tax Year Starts on 6 April 2026: What to Do Before Then
There are eighteen days until the new rates take effect. For directors who have not yet reviewed their 2026/27 profit extraction strategy, the time to act is now.
The actions most worth taking before 6 April 2026 are as follows.
Review any planned dividend payments for the current tax year. Dividends declared and paid before 6 April 2026 are taxed at the 2025/26 rates. A higher rate taxpaying director who was planning to pay a dividend of £30,000 in April 2026 saves 2% — approximately £600 — by paying it in March 2026 instead.
Confirm your 2026/27 salary level. The optimal figure of £12,570 for most sole directors is unchanged, but the interaction with employer NI and CT reliefs should be confirmed for your specific profit projection.
Model your 2026/27 pension contribution. Given the new dividend rates, the relative attraction of employer pension contributions has increased. If you have carry forward allowance from prior years, this is the moment to use it.
Review your shareholder structure. If your spouse holds shares but has not been receiving dividends — or if the structure has not been reviewed since it was set up — confirm that the arrangement is commercially defensible before the new year starts.
Frequently Asked Questions
How much has dividend tax increased from April 2026?
The basic rate of dividend tax rises from 8.75% to 10.75% — an increase of 2 percentage points. The higher rate rises from 33.75% to 35.75% — also an increase of 2 percentage points. The additional rate remains unchanged at 39.35%. The dividend allowance — the amount of dividend income received free of tax each year — remains at £500.
What is the tax free dividend allowance and has it changed?
The dividend allowance for 2026/27 remains at £500. This is unchanged from 2025/26. It means the first £500 of dividend income received in the tax year is free of dividend tax regardless of the recipient's tax band. Above £500, dividend tax applies at the full applicable rate. The allowance was £5,000 as recently as 2017 and has been progressively reduced to its current minimal level.
What is the optimal director salary for 2026/27?
For most sole directors of owner managed companies that cannot claim the Employment Allowance — because the sole employee is also the sole director — the optimal salary remains £12,570, the personal allowance threshold. At this level, no income tax or employee NI is payable by the director. The company pays employer NI at 15% on the amount above the £5,000 secondary threshold, costing approximately £1,136, but this is deductible against Corporation Tax. The salary itself is fully CT deductible.
How does an employer pension contribution compare to taking dividends after the rate rise?
An employer pension contribution from your company is deductible against Corporation Tax, does not attract income tax or NI at the point of contribution, and grows tax free inside the pension wrapper. A dividend is paid from after tax company profits and then attracts dividend tax at 10.75%, 35.75%, or 39.35% depending on your tax band. The 2 percentage point dividend tax rise from April 2026 has widened the relative advantage of the pension contribution over the dividend route. For a higher rate taxpaying director, the pension route saves approximately 35.75% in dividend tax that would otherwise be paid, and the company saves 25% in Corporation Tax on the contribution — producing a combined tax benefit that makes the pension route significantly more efficient.
What is the 60% tax trap and how can I avoid it?
Where total income — salary plus dividends plus any other income — exceeds £100,000, the personal allowance of £12,570 is gradually withdrawn at a rate of £1 for every £2 of income above £100,000. Within the band between £100,000 and £125,140, the effective marginal income tax rate is 60%, not 40%. The most effective way to avoid the taper is to keep total personal income at or below £100,000 by retaining surplus profit in the company rather than extracting it as dividends, or by making employer pension contributions that reduce the company's distributable profit without adding to personal income.
Is it worth paying my spouse dividends from our company?
Where your spouse holds shares with genuine economic substance and receives dividends as a genuine return on their shareholding, paying dividends to a lower rate or spouse who pays no tax can significantly reduce the household dividend tax bill. The saving is the difference between the director's dividend tax rate and the spouse's rate — potentially 25 percentage points (35.75% versus 10.75%) on income within the basic rate band. HMRC's settlement provisions can apply where the arrangement is structured primarily to divert income from the director to the spouse for tax purposes without genuine commercial substance. The arrangement must represent a real economic interest in the business, not a tax driven paper transaction.
Does the dividend tax rise make the limited company structure less worthwhile?
Not for most directors, but the calculation is closer than it was. The combined effective tax rate on profits extracted as dividends — Corporation Tax plus dividend tax — has risen by approximately 2 percentage points at the higher rate. The limited company remains more tax efficient than the sole trader route for most directors earning above approximately £40,000 per year, particularly where employer pension contributions are used. The optimal position requires annual modelling of your specific income level, profit projection, and pension position rather than a blanket assumption that dividends always win.
Can I pay a dividend before 6 April 2026 to use the lower rates?
Yes. A dividend declared and paid before 6 April 2026 is subject to the 2025/26 rates — basic rate 8.75%, higher rate 33.75%. You cannot declare a dividend after 5 April 2026 and apply it to the current tax year. The dividend must be both declared and paid before the tax year end. Where you are a sole director and sole shareholder, you can resolve to pay a dividend and arrange payment before 5 April 2026. The board minutes and dividend voucher must be prepared at the time — not retrospectively.
What is the Employment Allowance and can my company claim it?
The Employment Allowance allows eligible employers to offset the first £10,500 of employer NI liability per tax year. Where the Employment Allowance is available, the CT efficient salary level changes — a director can take a higher salary before employer NI becomes a net cost to the company, making dividend extraction less necessary at lower income levels. However, the Employment Allowance is not available to companies where the only employee is also the sole director. It becomes available where a employee who is not a director is also on the payroll — a spouse in an administrative role, for example. This is one reason why employing a spouse at a genuine market rate for genuine work can be worthwhile from a tax planning perspective.
What CoreAcc Accountants Can Help You With
The optimal profit extraction strategy for 2026/27 is not the same as it was in 2025/26, and it is not the same for every director. It depends on your company's profit level, your personal income from all sources, your pension position, your family circumstances, and your plans for the business over the next three to five years.
At CoreAcc Accountants, we carry out a remuneration review for every director shareholder client at the start of each tax year. Specifically, we model the optimal salary for your specific company and personal tax position, taking into account the Employment Allowance position, CT rates, and NI thresholds. We calculate the maximum dividends that can be taken within the basic rate band and, where relevant, within the £100,000 personal allowance threshold. We model the employer pension contribution that maximises CT relief while staying within your annual allowance. We review your shareholder structure and advise on whether spousal dividends are defensible and efficient in your specific circumstances. And we prepare the board minutes and dividend vouchers required for every dividend payment to ensure full compliance.
Get in Touch
The 2026 dividend tax rise takes effect on 6 April 2026. Whether you want to accelerate a dividend before the rate change, model your 2026/27 strategy from the new tax year, or review your remuneration structure for the first time in several years, CoreAcc Accountants is ready to help.
Contact us today for a profit extraction review.
CoreAcc Accountants is an ACCA accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was published on 19 March 2026 and reflects tax rates and legislation in force for the 2026/27 tax year beginning 6 April 2026. It does not constitute professional tax or financial advice. Always seek specific advice for your individual circumstances.
