SHOULD YOU CHANGE YOUR SALARY AND DIVIDEND STRATEGY THIS TAX YEAR?

If you run a limited company and pay yourself through a mix of salary and dividends, something changed on 6 April 2026 that is worth your attention.

Dividend tax rates went up. Not dramatically, but enough that the arithmetic you settled on two or three years ago may no longer be doing what you think it is doing. The question is not whether you should tear up your approach: for most directors, the salary-plus-dividends model still holds. The question is whether the specific numbers still fit.

WHAT CHANGED IN APRIL 2026

The Autumn Budget 2025 confirmed a 2 percentage point rise in dividend tax rates, effective from 6 April 2026. The ordinary and upper rates both went up. The additional rate did not move.

Band	2025/26	2026/27
Basic rate	8.75%	10.75%
Higher rate	33.75%	35.75%
Additional rate	39.35%	39.35%

The dividend allowance stays at £500. It is worth remembering what that allowance really is: a nil-rate band rather than a deduction. The first £500 is taxed at 0%, but it still consumes £500 of whichever band you are sitting in. It does not create an extra basic rate room.

Nothing else in the immediate picture moved much. The Personal Allowance remains £12,570 and is frozen. The employer National Insurance rate stays at 15% above a £5,000 secondary threshold, both unchanged since April 2025. The Employment Allowance remains £10,500, and remains unavailable to companies where a sole director is the only person on the payroll.

WHAT IT COSTS YOU IN PRACTICE

The effect is easier to see with figures than percentages.

Take a director on a £12,570 salary who draws £37,700 in dividends, filling the basic rate band exactly. In 2025/26 the dividend tax on that would have been around £3,255. For 2026/27, on identical income, it is around £3,999. That is roughly £744 more for doing nothing differently.

Push the dividends to £50,000 on the same salary and part of the income moves into the higher rate band. The dividend tax bill rises from roughly £7,406 to roughly £8,396, an increase of around £990.

These are illustrative figures assuming no other income and a standard tax code. Your own position will differ. But the shape of the change is consistent: for every £1,000 of dividends taxed at the basic or higher rate, you are paying an extra £20.

DOES SALARY NOW BEAT DIVIDENDS?

No, and this is where some of the commentary has overstated things.

Dividends are still taxed considerably more lightly than salary at the personal level. A basic rate taxpayer pays 10.75% on dividends. The equivalent salary would attract 20% income tax plus 8% employee National Insurance, before the company's own 15% employer National Insurance on top. A 2 point rise does not close a gap that wide.

What has changed is the margin. The dividend route can still be the more efficient one for most owner-managed companies, but it is less comfortable than it was, which makes getting the salary element right matter more than it used to.

THE SALARY QUESTION

For 2026/27, most directors are likely choosing between three levels.

£5,000 sits exactly at the secondary threshold. No employer National Insurance is due at all. It also sits below the Lower Earnings Limit, which means it does not secure a qualifying year for the State Pension. That is a meaningful long-term trade-off for a small short-term saving, and it is rarely the right answer.

£6,708 is the Lower Earnings Limit for 2026/27. It secures a qualifying year for the State Pension at an employer National Insurance cost of roughly £256. For sole directors who want the pension credit while keeping National Insurance to a minimum, this could be a good solution.£12,570 uses the full Personal Allowance.

No income tax, no employee National Insurance, and a qualifying year secured. The employer National Insurance cost is around £1,136 for a sole director who cannot claim the Employment Allowance. Against that sits the Corporation Tax relief on both the salary and the National Insurance itself, which for most companies more than covers the cost.

For companies with two or more people on the payroll, the Employment Allowance absorbs the employer National Insurance entirely, and £12,570 becomes the straightforward choice.

For sole directors, it is closer than the confident headlines suggest. The answer depends on your profit level and therefore your effective Corporation Tax rate, whether you have other income, and whether you have a contract of employment that brings National Minimum Wage into play. Modelling it on your actual figures can be worth several hundred pounds a year.

FOUR THINGS WORTH REVIEWING

Share ownership. If your spouse or civil partner has unused Personal Allowance or basic rate band, dividends paid to them may be taxed at a lower rate or not at all. Share structures need to be set up properly to work, and the settlements legislation is a real consideration, so this is one to take advice on rather than act on unilaterally.

Company pension contributions. Employer contributions paid directly by the company remain deductible for Corporation Tax and free of National Insurance on both sides. As dividend extraction gets more expensive, the relative case for leaving profit in the company and routing it to a pension strengthens. Worth noting for context: the Autumn Budget 2025 announced a £2,000 cap on the National Insurance exemption for salary-sacrificed pension contributions from April 2029. Direct employer contributions are not affected by that change.

Timing. Dividends are taxed in the year they are declared and made available. If you are close to a band threshold, spreading dividends across tax years can keep more of the income in the lower band. This has to be done with proper documentation and sufficient distributable reserves.

Whether you need to extract it at all. Every pound taken out is taxed. Profit retained in the company is not taxed again until it is distributed. If you do not need the cash, the question of when to take it is a strategy decision.

SO, SHOULD YOU CHANGE?

For most directors, the honest answer is: probably not fundamentally, but almost certainly in the detail.

The salary and dividend model remains the sensible structure for the majority of owner-managed companies. What you should probably look at this year is the salary level, whether the Employment Allowance is being claimed where it is available, whether both spouses' allowances are being used where the shareholding supports it, and whether the pension route is being under-used now that dividends cost more.

The direction of travel over the last decade has been consistent: a smaller dividend allowance, higher dividend rates and frozen thresholds. That does not call for a panic, but it does call for the split to be reviewed once a year rather than set once and forgotten.

If you would like us to model your position on your own figures before you declare your next dividend, get in touch.

Note: This article is for general information and is based on our understanding of the rules at the time of writing. It is not advice and should not be relied upon as such. Figures are illustrative and your own position will depend on your circumstances. Please speak to us before acting.