Salary or dividends after the 2026 dividend tax rise

Dividend tax rose two points on 6 April 2026. What it means for London company directors choosing between salary and dividends in 2026/27.

If you run your own limited company, the dividends you take this tax year are taxed more heavily than last year's. From 6 April 2026 the tax on dividends rose by two percentage points at the basic and higher rates. That is law and already in force.

For a basic rate director it does not change the usual answer. It does mean last year's sums are out of date. I take a salary, dividends and a pension contribution from my own company, so the new rates apply to me too.

What changed on 6 April 2026

For 2026/27, after the £500 dividend allowance, dividend tax is:

10.75 per cent at the basic rate, up from 8.75 per cent;
35.75 per cent at the higher rate, up from 33.75 per cent;
39.35 per cent at the additional rate, unchanged.

The Personal Allowance is still £12,570, and the basic rate band still runs to £50,270 of total income. If London living costs mean you draw more than that in total, any dividends above it now pay 35.75 per cent.

Dividends also come out of profit that has already paid Corporation Tax. A company with profits of £50,000 or less pays 19 per cent.

A dividend still beats extra salary, by less

Illustration, not a real client. Take £1,000 of company profit, a company paying 19 per cent with no Employment Allowance, and a basic rate director whose salary is already above £12,570 and who has used the £500 dividend allowance.

As a dividend: the company pays £190 of Corporation Tax, leaving £810. Dividend tax at 10.75 per cent is £87.08. The director keeps £722.92. Last year they would have kept £739.12.
As extra salary: the company also pays employer National Insurance at 15 per cent, so the £1,000 covers £869.57 of salary and £130.43 of employer contributions. Income Tax at 20 per cent and employee National Insurance at 8 per cent leave the director £626.09.

The dividend still wins by about £97. The rise has taken £16.20 off its lead for every £1,000.

The salary decision: £5,000 or £12,570

Employer National Insurance starts at £5,000 a year. Income Tax and employee National Insurance start at £12,570.

You might expect the Employment Allowance, worth up to £10,500 a year, to cover the employer contributions. But gov.uk is clear: if your company has only one director, they must not be the only employee liable for secondary Class 1 National Insurance. A one-person company usually cannot claim it.

Illustration, not a real client. A sole director with no other income runs a company making £40,000 before her own pay. Everything left after tax is paid as dividends, and the company pays 19 per cent.

Salary of £12,570: employer National Insurance £1,135.50, Corporation Tax £4,995.96, dividend tax £2,235.84. She keeps £31,632.70.
Salary of £5,000: no National Insurance, Corporation Tax £6,650, dividend tax £2,180.10. She keeps £31,169.90.

The higher salary leaves her £462.80 better off. The extra £7,570 of salary costs £1,135.50 in employer contributions but saves about £1,654 of Corporation Tax, because salary and the National Insurance on it are deductible and dividends are not. A £5,000 salary is also below the £6,708 lower earnings limit, so unless she gets National Insurance credits or pays voluntary contributions, the year would not count towards her State Pension.

Change the profit, add a second director or a job elsewhere, and the answer can flip. Work through the salary and dividend split for 2026/27 with your own figures rather than borrowing someone else's.

The paperwork that makes a dividend a dividend

Your company must not pay out more in dividends than its available profits from the current and previous years. You must hold a directors' meeting to declare a dividend and keep minutes, even if you are the only director. Each payment needs a voucher showing the date, the company name, the shareholders and the amount. Keep the dividend vouchers and board minutes with the company's records.

Money taken out that is not salary, a properly declared dividend, an expense repayment or a repayment of money you have put in is a director's loan, which can bring its own tax charges.

Before 5 April 2027

Redo this year's mix at the new rates instead of repeating last year's.
Check where your total income sits against £50,270. Dividends above that line now cost 35.75 per cent.
If you are the only director and the only employee, do not count on the Employment Allowance. If you hire, check again.
Declare dividends from profits that exist, with minutes and vouchers, before the money leaves the account.

The two-point rise may not change what you decide. It should change how often you check.

About the author

Harvey Dhillon is the founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and worked in finance roles in investment banking, wealth management and private equity, starting at Barclays, before leaving in 2020 to build the firm. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Kai Pilger on Unsplash.