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💡 The rates and thresholds in this article are confirmed for the 2026/27 tax year (6 April 2026 to 5 April 2027). Sources are listed at the end. |
Dividend tax rates rose on 6 April 2026 — the second consecutive year of increases, and the fourth consecutive reduction to the dividend allowance. For limited company directors, this is not a marginal change. It affects every pound of profit extracted as a dividend above £500, and it arrives at the same time as income tax thresholds remain frozen.
This guide covers the actual numbers for 2026/27: how salary and dividends are taxed differently, where the optimal salary sits, what the new dividend rates cost in practice, and when the standard structure needs reconsideration.
How Salary and Dividends Are Taxed Differently
Salary is subject to income tax and National Insurance — both employee and employer contributions. It is a deductible business expense, which means paying salary reduces the company's taxable profit and therefore its Corporation Tax bill. Every £1 of salary paid reduces the CT liability by up to 25p for companies paying the main rate.
Dividends are paid from post-tax profit — money left after Corporation Tax has already been deducted. They are not subject to National Insurance, but they are taxed at specific dividend rates in the hands of the recipient. These rates are lower than income tax rates, but the gap has narrowed considerably since 2016.
|
Salary |
Dividends |
|
|
Source |
Pre-tax company profit |
Post-tax company profit |
|
Income tax |
20% (basic rate) |
10.75% (basic rate) from April 2026 |
|
National Insurance |
Employee NI + Employer NI |
None |
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Reduces Corporation Tax? |
Yes — it's a deductible expense |
No |
|
Requires distributable profit? |
No |
Yes — must have retained earnings |
|
Processing |
Via PAYE/payroll |
Via board resolution and minutes |
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⚠️ Dividends can only be paid from distributable profits — retained earnings after Corporation Tax. Paying dividends that exceed retained profits creates an unlawful dividend, which is a liability of the director personally. Always check the company's profit position before declaring a dividend. |
2026/27 Rates at a Glance
Dividend tax rates from 6 April 2026
|
Tax Band |
Income Range |
Rate 2025/26 |
Rate 2026/27 |
Increase |
|
Dividend allowance |
First £500 |
0% |
0% |
— |
|
Basic rate |
£500–£50,270 (above PA) |
8.75% |
10.75% |
+2pp |
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Higher rate |
£50,271–£125,140 |
33.75% |
35.75% |
+2pp |
|
Additional rate |
Above £125,140 |
39.35% |
39.35% |
Unchanged |
National Insurance for directors (2026/27)
|
Type |
Rate |
Threshold |
Notes |
|
Employer NI |
15% |
Above £5,000/year |
Deductible CT expense. Frozen at £5,000 until 2031 |
|
Employee NI |
8% |
£12,570–£50,270 |
2% above £50,270 |
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Employment Allowance |
Up to £10,500 offset |
Qualifying employers only |
Cannot be claimed where sole director is only employee |
Corporation Tax rates (unchanged)
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Company Profits |
Rate |
|
Up to £50,000 |
19% (small profits rate) |
|
£50,001–£250,000 |
Marginal relief — effective rate between 19% and 25% |
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Over £250,000 |
25% (main rate) |
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💡 Income tax thresholds — Personal Allowance (£12,570), basic rate limit (£50,270), and higher rate limit (£125,140) — are frozen until at least April 2028. Combined with rising wages, this means more directors drift into higher rate territory each year without any change to headline rates. This is fiscal drag, and it amplifies the impact of the dividend rate increase. |
The Optimal Director's Salary for 2026/27
Most directors set their salary at one of three levels, each reflecting a different trade-off between National Insurance costs, State Pension protection, and Corporation Tax relief. The right choice depends on whether your company has other employees and whether it qualifies for the Employment Allowance.
|
Salary Level |
Income Tax |
Employee NI |
Employer NI |
State Pension Credits |
Best For |
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£5,000/year |
None |
None |
None |
No (below LEL) |
Sole director, no Employment Allowance, minimising NI cost |
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~£6,500/year (LEL) |
None |
None |
£225 employer NI |
Yes — qualifying years protected |
Sole director who wants State Pension record without full NI cost |
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£12,570/year |
None |
None |
£1,135.50 employer NI |
Yes — full year credited |
Director with Employment Allowance, or with other employees on payroll |
The £12,570 salary has become the dominant choice for 2026/27 — particularly for companies with other employees where the Employment Allowance wipes out the employer NI cost entirely. The Corporation Tax deduction on a £12,570 salary is worth up to £3,143 at the 25% rate, which more than offsets the £1,135.50 employer NI liability even without the Employment Allowance.
The £5,000 salary remains sensible only where the Employment Allowance cannot be claimed (typically a sole director company with no other staff) and State Pension credits are being built through other means (e.g. employed elsewhere, or making voluntary Class 3 contributions).
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💡 The Employment Allowance for 2026/27 is £10,500. Companies where the director is the sole employee cannot claim it — but adding even one other qualifying employee to the payroll changes this. The allowance resets each year and must be claimed again through your payroll software. |
What the Rate Rise Actually Costs: Worked Examples
The following examples use confirmed 2026/27 thresholds and rates, with a £12,570 salary and dividends making up the remainder of income.
Example 1: Basic rate director — £50,000 total income
|
2025/26 |
2026/27 |
Difference |
|
|
Salary |
£12,570 |
£12,570 |
— |
|
Dividends |
£37,430 |
£37,430 |
— |
|
Dividend allowance used |
£500 |
£500 |
— |
|
Taxable dividends |
£36,930 |
£36,930 |
— |
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Dividend tax rate (basic) |
8.75% |
10.75% |
+2pp |
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Dividend tax payable |
£3,231 |
£3,970 |
+£739 |
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Income tax on salary |
£0 |
£0 |
— |
|
Total personal tax |
£3,231 |
£3,970 |
+£739/year |
Example 2: Higher rate director — £87,570 total income
|
2025/26 |
2026/27 |
Difference |
|
|
Salary |
£12,570 |
£12,570 |
— |
|
Dividends |
£75,000 |
£75,000 |
— |
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Dividends at basic rate (up to £50,270) |
£37,200 × 8.75% = £3,255 |
£37,200 × 10.75% = £3,999 |
+£744 |
|
Dividends at higher rate (above £50,270) |
£37,300 × 33.75% = £12,589 |
£37,300 × 35.75% = £13,340 |
+£751 |
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Total dividend tax |
£15,844 |
£17,339 |
+£1,495 |
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Income tax on salary |
£0 |
£0 |
— |
|
Total personal tax |
£15,844 |
£17,339 |
+£1,495/year |
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⚠️ The higher rate example assumes all dividend income falls neatly above the basic rate threshold. In practice, the split between bands depends on total income. Directors near the £50,270 boundary benefit most from checking the precise split before taking additional dividends. |
When the Standard Structure Needs Rethinking
For most directors with straightforward income and steady profits under £100,000, the salary-plus-dividends framework remains efficient. But there are specific circumstances where it should be reviewed rather than assumed.
Income approaching or above £100,000
The Personal Allowance tapers by £1 for every £2 of income above £100,000, disappearing entirely at £125,140. This creates an effective marginal income tax rate of 60% on income between those two figures. Pension contributions made before the tax year ends are one of the most reliable ways to keep income below this threshold, since they reduce adjusted net income for the purposes of the taper calculation.
Company paying 25% Corporation Tax
When a company's profits exceed £250,000 and CT is charged at the full 25% rate, the interaction between salary deductions and dividend extraction changes. At 25% CT, every additional £1 of salary costs the company 75p net but saves 25p in CT — a net cost of 75p. Taking the same pound as a dividend means the company pays 25p CT and the director pays 10.75p dividend tax on the 75p received, for a combined 35.75p cost on the original pound. The comparison shifts depending on whether income would be taxed at basic or higher rate dividend rates.
Employment Allowance eligibility
Companies that move from sole director to having at least one qualifying employee become eligible for the Employment Allowance. This changes the salary calculation significantly: at £12,570, the employer NI of £1,135.50 is offset in full, making the salary effectively cost-free from a National Insurance perspective while still delivering the CT deduction.
Using ISAs and pensions alongside dividends
The annual ISA allowance is £20,000 per person. Dividends received inside an ISA are not subject to dividend tax at any rate. For directors who hold shares personally, transferring holdings into an ISA or building new share positions within one removes those dividends from the rate-rise calculation entirely. Pension contributions work differently: they reduce adjusted net income, which can pull dividend income from the higher rate band back into the basic rate band — a 25pp difference in dividend tax rate (35.75% vs 10.75%).
Spousal income splitting
Where a spouse or civil partner is a genuine shareholder, dividends may be paid to them separately, making use of their own Personal Allowance and dividend allowance. For couples where one partner has lower income, this can effectively double the tax-free or basic rate dividend capacity of a household. This must reflect genuine ownership — arrangements structured solely for tax purposes without commercial substance will be challenged by HMRC under the settlements legislation.
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✓ The combined effect of the dividend rate increase, frozen thresholds, and reduced allowance means the salary-versus-dividend calculation needs running on current-year numbers each April — not inherited from prior years. Small structural changes compound into meaningful savings over time. |
Frequently Asked Questions
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What are the dividend tax rates for 2026/27? Basic rate: 10.75% on dividends above the £500 allowance up to £50,270 of total income. Higher rate: 35.75% on dividends where total income falls between £50,271 and £125,140. Additional rate: 39.35% on dividends above £125,140. These rates apply from 6 April 2026 and represent a 2 percentage point increase for basic and higher rate taxpayers. |
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Is it still tax-efficient to take dividends over salary in 2026? For most directors, yes — but by a narrower margin than in previous years. Dividends remain free from National Insurance and are taxed at lower rates than equivalent salary income. The key comparison depends on your Corporation Tax rate, your personal income band, and whether your company qualifies for the Employment Allowance. The standard £12,570 salary plus dividends structure is still broadly optimal for basic rate directors. |
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What is the dividend allowance for 2026/27? The dividend allowance is £500 — unchanged from 2025/26. This is a tax-free amount on which 0% dividend tax applies. However, it still counts towards your total income when determining which tax band applies to the rest of your dividends. The allowance was £5,000 as recently as 2017/18 and has been progressively reduced. |
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What is the optimal director salary for 2026/27? For most directors with other employees (or qualifying for the Employment Allowance): £12,570 — equal to the Personal Allowance. No income tax, no employee NI, and the employer NI cost of £1,135.50 is offset by the Corporation Tax deduction and eliminated entirely if the Employment Allowance applies. For sole directors without Employment Allowance eligibility: £5,000 avoids all NI, though this sacrifices State Pension credits. |
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Do dividends affect my Personal Allowance? Dividends count towards your total income for the purposes of the Personal Allowance taper. If salary plus dividends exceed £100,000, your Personal Allowance reduces by £1 for every £2 above that threshold. At £125,140, the allowance is zero. This is one of the most significant planning thresholds for directors with higher profits — pension contributions made in the same tax year can pull adjusted net income below £100,000. |
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Can my spouse receive dividends from my company? Yes, if they are a genuine shareholder. A spouse holding shares in the company is entitled to receive dividends on those shares, which will be assessed for tax against their own income — making use of their own Personal Allowance, dividend allowance, and potentially a lower tax band. The arrangement must reflect real ownership and commercial reality. HMRC can challenge artificial income-splitting structures under the settlement provisions. |
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Do I need to declare dividends on my tax return? Yes, if dividends from all sources exceed £500 in a tax year. Directors of close companies also have a separate disclosure obligation regardless of amount. Dividends above £10,000 require Self Assessment registration by 5 October following the end of the tax year. Amounts between £500 and £10,000 should be notified to HMRC or adjusted via your tax code. From 2025/26, HMRC can charge £60 per missing item from close company returns. |
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What happens if I pay too much in dividends? Dividends paid in excess of the company's distributable profits are unlawful dividends. If discovered — for example during an HMRC enquiry or when the company is dissolved — the director may be required to repay the excess to the company. Unlawful dividends can also create Corporation Tax complications. Always check retained profits before declaring, and document the board resolution. |
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Does dividend tax apply in Scotland? No. While Scotland sets its own income tax rates for non-savings, non-dividend income, dividend tax rates are set by Westminster and apply uniformly across the UK. A Scottish taxpayer pays the same dividend tax rates as an English taxpayer on their dividend income. |
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When do the 2026/27 dividend tax rates take effect? The new rates apply to dividends declared on or after 6 April 2026. For directors who planned to take dividends before the end of the 2025/26 tax year, the date of the board resolution determines which tax year the dividend falls in — not the date of payment. Dividends declared before 5 April 2026 are taxed at the 2025/26 rates. |
Sources
All figures and rates cited are drawn from the following official and professional sources, confirmed as of March 2026:
1. HM Revenue & Customs — Rates and Thresholds for Employers 2026 to 2027 — gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027
2. HMRC — Dividend Allowance factsheet — gov.uk/government/publications/dividend-allowance-factsheet
3. Finance (No.2) Act 2024–26 — Dividend Tax Rate Provisions — legislation.gov.uk
4. HM Treasury — Autumn Budget 2025 — Tax policy decisions (October 2025) — gov.uk/government/publications/autumn-budget-2025
5. HMRC — Corporation Tax rates and reliefs — gov.uk/corporation-tax-rates
6. HMRC — National Insurance: Rates and allowances — gov.uk/guidance/rates-and-allowances-national-insurance-contributions
7. HMRC — Employment Allowance 2026/27 — gov.uk/claim-employment-allowance
8. ICAEW Tax Faculty — Dividend tax rate changes April 2026 (2025) — icaew.com/technical/tax
9. IPSE — Dividend Tax Rates Rising in April: What it means for company directors (March 2026) — ipse.co.uk/articles/dividend-tax-rates-company-directors
10. Office for Budget Responsibility — Tax policy costings, Autumn Budget 2025 — obr.uk
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Disclaimer: This article is for general information purposes only and does not constitute financial, tax, or legal advice. Rates and thresholds are correct for the 2026/27 tax year as confirmed by HMRC. Individual circumstances vary. Always consult a qualified accountant or tax adviser before making decisions about director remuneration. Accounted is a trading name of Account-ed CIC. |