From 6 April 2026, dividend tax rates are 2% higher across the board. If you're a limited company director who pays yourself through a mix of salary and dividends — and most of you do — the numbers have shifted. Not dramatically, but enough to warrant a fresh look at your pay strategy for 2026/27.
Here's how the new rates change things, and what the most tax-efficient approach looks like this year.
What actually changed?
The dividend tax rates for 2026/27 are:
- Basic rate: 10.75% (was 8.75%)
- Higher rate: 35.75% (was 33.75%)
- Additional rate: 39.35% (unchanged)
The dividend allowance stays at £500 — the first £500 of dividend income you receive each year is tax-free. After that, you're paying at the rates above.
Meanwhile, the personal allowance remains frozen at £12,570, where it's been stuck since 2021 and will stay until at least 2030. The longer it stays frozen, the more people get dragged into higher tax bands by inflation. But that's a rant for another day.
The "standard" optimal salary: £12,570
For most single-director limited companies, the conventional wisdom still holds: pay yourself a salary of £12,570 per year.
Why that number? Because it matches the personal allowance exactly. You pay zero income tax on it. And since the employee NIC primary threshold sits at roughly the same level, you won't pay any employee National Insurance either.
Your salary is a deductible expense for the company, so it reduces your corporation tax bill. On £12,570 of salary, a company paying 19% corporation tax saves about £2,388 in CT. That's real money back in the business — or rather, money never paid out in the first place.
Then you take the rest as dividends, paid from post-tax profits. Dividends don't attract National Insurance at all, which is the main reason they're usually cheaper than a higher salary.
The employer NIC complication
Here's where it gets a bit more involved. Your company pays employer NIC at 15% on salary above the secondary threshold, which is £5,000 per year.
So on a salary of £12,570, the employer NIC bill comes to:
£12,570 − £5,000 = £7,570 × 15% = £1,135.50
That's a cost to the company. It's tax-deductible, sure — so the net cost after corporation tax relief at 19% is about £919. But it's still money leaving the business.
This is where the Employment Allowance makes a big difference. For 2026/27, it's £10,500. If your company qualifies (and most single-director companies with at least one other employee do), the Employment Allowance wipes out the first £10,500 of your employer NIC liability. That would cover the £1,135 above with room to spare.
If you're a sole director with no other employees, you can't claim Employment Allowance. In that case, some accountants recommend dropping the salary to £5,000 (the secondary threshold) to avoid employer NIC entirely, then taking more as dividends. Whether that saves you money overall depends on your total income and tax band — it's worth running the numbers both ways.
Running the numbers on dividends
Let's say your company has £60,000 in profit after paying your £12,570 salary. Corporation tax at 19% takes £11,400, leaving £48,600 in retained profits available for dividends.
You take £48,600 as dividends. After the £500 tax-free allowance, you're paying dividend tax on £48,100.
The first chunk falls within the basic rate band. Your remaining basic rate band after using £12,570 of it on salary is roughly £37,700 − £12,570 = £25,130. So:
- £500 at 0% = £0
- £24,630 at 10.75% = £2,647.73
- £23,470 at 35.75% = £8,390.53
Total dividend tax: roughly £11,038.
Last year, at the old rates, the same figures would have produced about £10,549 in dividend tax. So the 2% hike costs you around £490 extra on this level of income.
Not life-changing. But it adds up, especially if you're taking larger dividends or sitting entirely in the higher rate band.
Dividend Tax Calculator 2025/26
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Use the Dividend TaxWhen a higher salary might make sense
The salary-at-personal-allowance approach works for most people, but there are situations where paying yourself more can actually save tax overall.
You're already a higher rate taxpayer from other income. If you have rental income, a second job, or investment income pushing you into 40%, your dividends are being taxed at 35.75%. A salary attracts 40% income tax plus 2% employee NIC (42% total), but it saves the company 19-25% in corporation tax. The gap narrows considerably.
You want to maximise pension contributions. Your pension annual allowance is based on your earnings — not dividends. A higher salary means you can make larger personal pension contributions and claim tax relief on them. For directors thinking about retirement planning, this matters.
You're building your state pension record. You need to earn above the lower earnings limit (£6,396 for 2026/27) to get a qualifying year for state pension. A salary of £12,570 comfortably covers this, but if you'd dropped to the secondary threshold of £5,000, you'd be below it.
You have unused Employment Allowance headroom. If your company already employs staff and you're claiming Employment Allowance, some or all of your employer NIC could be absorbed. That removes the biggest cost argument against a higher salary.
Pensions: the third option everyone forgets
Employer pension contributions are arguably the most tax-efficient way to extract money from a limited company. Here's why.
An employer pension contribution is:
- A deductible expense for the company (saves corporation tax)
- Not subject to employer NIC
- Not subject to employee NIC
- Not subject to income tax at the point of contribution
You do pay income tax when you eventually draw the pension, but 25% of it comes out tax-free, and by then you may be in a lower tax band.
The annual allowance for pension contributions in 2026/27 is £60,000 — and you can carry forward unused allowance from the previous three years. For a profitable company, putting £20,000-£40,000 into a pension can save more tax than any salary/dividend split.
The catch is you can't touch the money until you're 57 (rising to 58 from 2028). If you need the cash now, pensions won't help. But if you're already drawing enough to live on, diverting some profit into a pension is hard to beat.
Practical advice for 2026/27
If you haven't changed anything since last year, your pay structure probably still works — but it's costing you slightly more in dividend tax. Review whether you're claiming Employment Allowance and whether your salary level is still optimal.
If you're a sole director with no staff, look at whether £5,000 or £12,570 works better as your salary. The answer depends on your total income, but for most people earning under £50,000 from the company, the personal allowance salary still wins.
If you're taking dividends above the basic rate band, the 2% increase hurts more. This is where pension contributions start looking very attractive as an alternative.
Get your board minutes right. Dividends must be declared properly — a board resolution with a date, amount, and confirmation that the company has sufficient retained profits. HMRC can (and do) reclassify poorly documented dividends as salary, which means full NIC on the lot.
Don't forget the £500 dividend allowance applies per person. If your spouse is a shareholder, they get their own £500 allowance and their own basic rate band. For couples running a company together, splitting dividends across two shareholders can save thousands.
The 2% hike isn't a reason to panic or restructure everything overnight. But it is a nudge to check the maths, claim what you're entitled to, and make sure you're not leaving money on the table. Your accountant should be running these numbers for you every April — and if they're not, that tells you something too.
