From 6 April 2026, the basic rate of dividend tax rose to 10.75 percent, up from 8.75 percent, with the higher and additional rates rising too. For directors who pay themselves through a mix of salary and dividends, the change alters the maths of that mix. It does not change the strategy, but it does change the numbers behind it.
What actually changed
The basic rate of dividend tax moved to 10.75 percent from 6 April 2026, and the higher and additional rates rose as well. The tax free dividend allowance remains at a low level after being reduced in stages over recent years. The result is that dividends remain efficient, but less so than they were a few years ago.
Why directors pay themselves in dividends
A limited company director can take money as salary, as dividends, or both. Salary is a deductible expense for the company but attracts income tax and National Insurance. Dividends are paid from post tax profits, are not deductible, and carry no National Insurance. That combination is why the salary plus dividend mix is so common.
The salary versus dividend trade-off
The usual approach is to take a salary up to a sensible threshold, often aligned with the personal allowance or the National Insurance primary threshold, and then take the rest as dividends. The rise in dividend tax narrows the gap between the two routes but does not close it. For most directors the mix still works, the advantage is simply smaller.
The effect on a typical director
For a director taking a modest salary and the rest in dividends, the change means a smaller amount in hand for the same profit. The exact figure depends on total income and the rates that apply. The practical effect is a few hundred pounds a year for many owner managers, and more for those with higher incomes.
Other taxes to keep in view
Dividend tax is not the only moving part. Corporation tax rates, the National Insurance thresholds and the personal allowance all shape the total. A change to any one alters the optimal mix. This is why the salary and dividend decision is best revisited each year rather than set once and forgotten.
What directors should do now
Review the current mix with your accountant before the new rates bite. Check whether the salary level is still optimal, whether pension contributions would be better than dividends for part of the profit, and whether the company can make the distributions it plans. Pension contributions in particular can be an efficient alternative for some directors.
Why this is a nudge, not a crisis
The rise matters, but it is a nudge, not a reason to restructure. Dividends remain free of National Insurance and remain a legitimate way to draw from a company. The sensible response is a quick review, not a dramatic change. Confirm the specifics with your accountant, because the right answer depends on your full picture.
The change is small but worth planning around, and the numbers are easier to steer when your records and systems are in order. Directors who review the mix each year tend to keep more of what the company earns. Need help with this? Azryno is a web design agency based in Colombo, Sri Lanka. We build websites, brand identities, and graphic design that work for real businesses. Get in touch at https://www.azryno.com to get started.
Sources
GOV.UK guidance on tax on dividends and the rates for 2026 to 2027.