Dividend Tax Rise 2026/27: What It's Costing Company Directors

If you're a company director who takes part of your income as dividends, you'll likely have noticed your tax bill creeping up this year. From 6 April 2026, dividend tax rates rose by two percentage points across the board, continuing a run of changes that has seen dividend taxation tightened seven times in eleven years. For many directors of owner-managed companies in and around Bury, it's worth taking a proper look at what this actually costs, and whether your salary-and-dividends split still makes sense.

What Actually Changed

The increase applies to dividends taken outside an ISA or pension, which covers most company directors paying themselves from company profits. From the 2026/27 tax year:

• Basic rate dividend tax rose from 8.75% to 10.75%

• Higher rate dividend tax rose from 33.75% to 35.75%

• The additional rate stayed at 39.35%

• The tax-free dividend allowance remains just £500, down from £2,000 in 2023 and £5,000 before 2016

On their own, two percentage points might not sound like much. In practice, it adds up quickly once you're drawing a meaningful amount of profit each year.

What It Actually Costs

A basic or higher rate taxpayer drawing £20,000 in dividends is now paying around £390 more tax a year than before the rise. The Association of Independent Professionals and the Self-Employed estimates that a typical director taking roughly £50,000 through a mix of salary and dividends could be around £600 worse off annually. HMRC figures suggest 3.7 million people will pay some dividend tax this year, more than double the number five years ago, and the change is expected to raise the Treasury an extra £280 million next tax year, rising towards £1.4 billion a year by the end of the decade.

Is a Salary-and-Dividends Mix Still Worth It?

Despite the rise, dividends still usually come out ahead of salary for most company directors. They carry no National Insurance and are only taxed once corporation tax has already been applied, whereas salary is taxed and National Insurance'd before it ever reaches you. The common approach, a modest PAYE salary set around the personal allowance to protect state pension entitlement, topped up with dividends, generally still works, but the gap has narrowed. In one recent industry survey, more than one in five directors said they'd consider shifting further towards PAYE salary because of the increase.

Pension contributions made directly by the company remain one of the more effective ways to extract profit without triggering the higher dividend rates: they reduce the company's corporation tax bill, avoid employer National Insurance, and aren't taxed as income until you draw them in retirement. If you haven't reviewed how you take money out of your limited company in a while, a rate change like this is a good prompt to do it properly rather than leaving it on autopilot.

Worth Reviewing Before the Budget

The Autumn Budget lands on 28 October, and both dividend and pension taxation are areas being watched closely this year. Whatever the Chancellor announces, the rates above are already locked in for the rest of 2026/27, so there's no need to wait and see before reviewing your own numbers. If you're about to vote a final dividend, finalise director's remuneration for the year, or simply haven't looked at your salary and dividend split in a while, now is a sensible time to do it, rather than finding out at your next tax return how much the change actually cost you.

Need a hand with this? We're accountants in Bury, and our limited company accounts service covers it for a fixed fee.

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