Dividend tax rates rose by two percentage points for the 2026/27 tax year. The ordinary rate went from 8.75 per cent to 10.75 per cent and the upper rate from 33.75 per cent to 35.75 per cent. The additional rate was left at 39.35 per cent.
The increase was announced in the Budget on 26 November 2025 and took effect from 6 April 2026. The dividend allowance, the amount of dividend income that can be received before any dividend tax is charged, remains £500.
HM Treasury’s policy paper on the change states that more than 90 per cent of UK taxpayers do not receive taxable dividend income at all, because their holdings sit inside ISAs and pensions or fall within the allowance. The measure is concentrated on shareholder directors of private companies and on investors holding shares outside tax-advantaged accounts.
How the rates apply
Dividends are treated as the top slice of income. They sit above earnings, pensions and savings interest, so the rate charged depends on how much other income the shareholder already has.
For 2026/27 the personal allowance is £12,570 and the basic rate band covers the next £37,700 of taxable income, taking the higher rate threshold to £50,270. The additional rate starts at £125,140. All three figures are frozen, and the Budget extended that freeze to 2031, so dividend income that pushes a director past £50,270 will do so at an unchanged threshold for a further five years.
Take a director paying themselves a £12,570 salary and £40,000 in dividends. The salary uses the personal allowance. Of the dividends, £500 falls within the dividend allowance and is taxed at nil, £37,200 is taxed at the ordinary rate of 10.75 per cent, and the remaining £2,300 sits above the higher rate threshold and is taxed at 35.75 per cent.
The £500 allowance does not remove that income from the calculation. It uses up part of the basic rate band, which is why the figure taxed at the ordinary rate is £37,200 rather than £37,700.
That produces a dividend tax bill of £4,821.25. On the rates that applied in 2025/26 the same package would have produced £4,031.25. The increase costs that director £790 for the year, which is two per cent of the £39,500 of dividends taxed above the allowance.
Salary or dividend
Because dividends are paid out of profit that has already borne corporation tax, any comparison between the two routes has to start at company level rather than at the director’s payslip.
Salary and the employer National Insurance paid on it are both deductible against corporation tax. Dividends are not. Employer National Insurance is charged at 15 per cent on earnings above a secondary threshold of £5,000 a year, according to HMRC’s rates and thresholds for employers. Employees pay eight per cent between £12,570 and £50,270 and two per cent above that.
Run £100 of company profit through each route and the answers differ by band.
For a basic rate director in a company paying the 19 per cent small profits rate, £100 of profit taken as a dividend leaves £81, which after 10.75 per cent dividend tax is £72.29. The same £100 taken as salary covers £86.96 of gross pay plus £13.04 of employer National Insurance, and after 20 per cent income tax and eight per cent employee National Insurance the director keeps £62.61.
For a higher rate director in a company paying the 25 per cent main rate, the dividend route leaves £75, which after 35.75 per cent dividend tax is £48.19. The salary route leaves £50.43 once 40 per cent income tax and two per cent employee National Insurance are taken. On those figures the salary route leaves £2.24 more.
Companies paying the 26.5 per cent marginal rate on profits between £50,000 and £250,000 see the dividend figure fall further, to £47.22.
Above £125,140 the additional rate of 39.35 per cent applies to dividends and was not changed, so the position at that level is the same as in 2025/26. The two percentage point rise applies only to dividends falling within the basic and higher rate bands.
The salary level itself
The other decision is where to set the salary before dividends start. Employer National Insurance begins at £5,000, so a salary at that level carries none. A salary at the £12,570 personal allowance carries employer National Insurance of £1,135.50 for a company that cannot use the Employment Allowance.
That is not the whole cost. The extra £7,570 of salary and the £1,135.50 of employer National Insurance are both deductible, worth £1,654.05 at the 19 per cent small profits rate, so the company’s net additional cost is £7,051.45 to put £7,570 into the director’s hands free of income tax and employee National Insurance.
The Employment Allowance is £10,500 for 2026/27, but HMRC’s eligibility rules state that where a company has only one director, that director must not be the only employee liable for secondary Class 1 National Insurance. Single-director companies are therefore outside it.
The lower earnings limit is £6,708 for the year. Salaries at or above that level count towards the National Insurance record even where no contributions are actually due.
The employer National Insurance rate rose from 13.8 per cent to 15 per cent in April 2025. Figures from UHY Hacker Young reported by Business Matters put the total employer bill at £143.9bn in the first year of the higher rate, £4bn above the Treasury’s forecast.
Companies carrying out qualifying innovation have a further lever on the profit figure itself through research and development tax credits, which reduce the corporation tax charge before any extraction decision is made.
Amy Ingham
Amy Ingham is a reporter at Business Matters, covering UK business news with a focus on breaking news, business policy, late payments and insolvency. She joined the magazine in 2026 after completing the NCTJ Diploma in Journalism at Harlow College's journalism school. Her recent reporting includes British Steel's nationalisation and its impact on SME suppliers, the decline in late payments by large firms, and Insolvency Service director disqualifications. Reach her at aingham@cbmeg.co.uk.
