For most owner-managed businesses, the low-salary-plus-dividends model has been settled practice for years. It is still the right answer in most cases. But the gap it relies on narrowed on 6 April 2026, and anyone who has not revisited the numbers since is working from a stale calculation.
What changed on 6 April 2026?
The ordinary and upper dividend rates each rose by two percentage points. The additional rate did not move.
- Ordinary rate (basic rate band): 8.75% to 10.75%
- Upper rate (higher rate band): 33.75% to 35.75%
- Additional rate: 39.35%, unchanged
- Dividend allowance: £500, unchanged
That is an extra £20 of tax for every £1,000 of dividends falling in the basic or higher rate bands.
What does it cost in practice?
Take a director on a salary equal to the personal allowance, drawing £75,000 in dividends. The additional tax in 2026/27 is roughly £1,490 — for doing precisely what they did the year before.
A higher-rate taxpayer receiving £10,000 of dividends outside an ISA pays around £358 more than in 2025/26.
Neither figure is ruinous. Both are real, and both compound with everything else that has moved: employer National Insurance at 15%, and the continuing freeze on income tax thresholds to 2030/31, which quietly drags more dividend income into the higher rate band each year.
Does this change the low-salary-plus-dividends model?
Usually not, but it narrows the margin, and it makes two things worth re-examining.
The salary level. The optimal salary depends on whether the company can claim the Employment Allowance. Companies with a single director and no other employees generally cannot, which changes the arithmetic materially. If your salary level was set several years ago and nobody has revisited it since the employer National Insurance changes, it is very likely no longer optimal.
Employer pension contributions. These remain the most efficient extraction route available: deductible for corporation tax, no income tax, no National Insurance either side. As dividend rates rise, the relative case strengthens. Note the £2,000 cap on National Insurance relief for pension salary sacrifice from April 2029, which affects sacrifice arrangements rather than straightforward employer contributions.
What about corporation tax?
It has not changed, but it interacts. Profits are taxed in the company before dividends are paid, so the effective total rate on extracted profit depends on where the company sits relative to the small profits rate, the main rate, and the marginal relief band between them.
A company paying the main rate and a shareholder paying the upper dividend rate face a combined burden materially higher than in 2024/25. That is the calculation worth running properly rather than assuming.
What should you actually do?
Model it, once, for your own numbers. The variables that matter are your profit level, your other income, whether Employment Allowance is available, and whether you need the cash personally at all.
That last one is the question most often skipped. Tax on a dividend is triggered by taking it. Where the cash is not needed, retaining profits or making an employer pension contribution avoids the charge entirely rather than optimising it.
Try our Dividend vs Salary calculator at /tools/dividend-vs-salary for an indicative figure, then speak to us before you set next year’s salary.
Frequently asked questions
What are the dividend tax rates for 2026/27?
10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band, after the £500 dividend allowance. The ordinary and upper rates each rose by two percentage points on 6 April 2026; the additional rate and the allowance were unchanged.
How much more tax will I pay on dividends this year?
Roughly £20 for every £1,000 of dividends falling in the basic or higher rate bands. A director drawing £75,000 in dividends pays around £1,490 more than in 2025/26. Additional rate taxpayers are unaffected.
Is salary now better than dividends?
In most cases, no — dividends still avoid National Insurance entirely, and that remains the larger effect. But the margin narrowed, and the right salary level depends on whether your company can claim the Employment Allowance. Single-director companies generally cannot, which changes the answer.
What is the dividend allowance for 2026/27?
£500, unchanged. It works as a nil-rate band rather than a deduction, so it still uses up £500 of whichever tax band it falls in. Dividends held within an ISA are outside the charge entirely and do not count towards it.
Should I take dividends I do not need?
Frequently not. The charge is triggered by taking the dividend. Where the cash is not required personally, retaining profits or making an employer pension contribution defers or avoids the charge rather than merely reducing it. This is the most overlooked point in profit extraction planning.