If you run a limited company, dividends are still the most tax-efficient way to get money out of your company and into your pocket — but the margin is a lot thinner than it was. The tax-free allowance has been hacked down from £2,000 to just £500, and on 6 April 2026 the ordinary and upper dividend rates each went up by two percentage points following the Autumn Budget 2025.
The Dividend Allowance
For 2026/27, you can receive £500 in dividends tax-free. That’s it. It was £2,000 until April 2023, fell to £1,000, and hit £500 in April 2024, where it has stayed. For most company directors, this barely registers. Nearly all your dividend income is now taxable.
Dividend Tax Rates
Above the £500 allowance, dividends are taxed at these 2026/27 rates:
- Ordinary (basic) rate: 10.75% — up from 8.75%
- Upper (higher) rate: 35.75% — up from 33.75%
- Additional rate: 39.35% — unchanged
Both increases took effect on 6 April 2026. The additional rate was left alone, so the gap between the upper and additional rates has narrowed to under four percentage points. If you are filing a return for 2025/26, you still use the old 8.75% and 33.75% rates for that year.
These are still lower than equivalent income tax rates, because the company has already paid Corporation Tax on the profits before distributing them. But the combined hit on corporate profits paid out as dividends now works out at roughly 48% for a higher-rate taxpayer whose company pays the 19% small profits rate. That is a real bite.
The Salary-and-Dividend Strategy
Most company directors use a specific approach to minimise tax. For 2026/27, the go-to strategy is:
- Pay yourself a salary up to the NI Primary Threshold (£12,570) — uses your Personal Allowance, qualifies you for State Pension, no NI to pay
- Take the rest as dividends up to the basic-rate band limit (£50,270 total income)
- If you need more, weigh up whether the higher dividend tax rate is acceptable or if there are smarter ways to extract the money
Take Lisa, an IT consultant in Bristol drawing £50,000 from her limited company. Using this strategy — a £12,570 salary plus £37,430 in dividends — her personal tax bill is about £4,000 in dividend tax at the 2026/27 rates. That was around £3,200 before April 2026, so the rate rise cost her roughly £750 a year on its own. If she took the whole £50,000 as salary instead, she’d pay roughly £7,500 in income tax and another £3,000 in employee National Insurance, so around £10,500. Her company still pays Corporation Tax on the profits behind those dividends, so the true saving is a good deal smaller than the headline gap — but the dividend route still wins.
Why Dividends Beat Salary
Two reasons: no National Insurance on dividends (saving both employee and employer NI), and lower headline tax rates. But remember, dividends come from post-Corporation Tax profits, so you need to factor in the 25% the company already paid.
For basic-rate taxpayers, the combined rate on dividends (19% Corporation Tax then 10.75% dividend tax) is now about 27.7%, versus 28% for salary in income tax and employee NI alone — before the company’s 15% employer NI is added on top. The April 2026 rate rise has closed most of that gap at basic rate. Dividends still win once employer NI is in the picture, but the margin is nothing like it was, so run your own numbers rather than assuming.
Planning Ideas
- Spouse as shareholder: If your partner is a basic-rate taxpayer or earns under the Personal Allowance, giving them shares means their dividends are taxed at their lower rate. But the shares must carry genuine rights and your spouse must be a real shareholder — HMRC won’t accept a sham arrangement.
- Pension contributions from the company: Extremely tax-efficient. The company contribution is deductible for Corporation Tax, and there’s no income tax or NI for you. It’s probably the most efficient way to extract value above the basic-rate band.
- Retained profits: If you don’t need the money right now, leave it in the company. You delay the dividend tax until you actually take it out, and you can time withdrawals around tax bands.
Work Out Your Dividend Tax
Our free dividend tax calculator shows exactly how much you’ll pay on your dividends, compares the salary-vs-dividend position, and helps you find the best mix for your circumstances. Takes a couple of minutes.