If you run your business through a limited company and take income as a combination of salary and dividends, the tax landscape you are operating in has shifted considerably over the past few years and needs careful attention in 2026. The dividend allowance has fallen from £2,000 in 2022/23 to £500 today, the ordinary and upper dividend tax rates increased from 6 April 2026, employer National Insurance remains higher than it used to be, and the personal allowance remains frozen.
Taken together, these changes mean the tax cost of extracting money from your company is higher than it was a few years ago. The salary and dividend strategy that made sense then may not be the most efficient approach for the 2026/27 tax year.
This article sets out the current dividend tax rates, explains how they interact with salary, corporation tax and the personal allowance, and gives you a clear picture of what you should be reviewing.
The Current Dividend Tax Rates and Allowance
For 2026/27, the dividend allowance remains £500. This is the amount of dividend income you can receive at a 0% dividend tax rate each year. It sits within your tax bands, so it does not create an additional band of income on top of the basic rate band.
Any dividends above this threshold are taxed at rates that depend on which income tax band the dividend income falls into when added on top of your other income.
The current dividend tax rates for 2026/27 are as follows.
| Tax Band | Dividend Tax Rate | Applies When Total Income, Including Dividends, Falls Within |
|---|---|---|
| Basic rate | 10.75% | Income within the basic rate band |
| Higher rate | 35.75% | Income within the higher rate band |
| Additional rate | 39.35% | Income above the additional rate threshold |
Dividends sit on top of other income for tax purposes. This means your salary, rental income, pension income or other taxable income uses up your personal allowance and tax bands before your dividends are taxed.
For example, if your salary is £12,570, your personal allowance is fully used by that salary. Your first £500 of dividends are taxed at 0% because of the dividend allowance. The rest of your dividend income is taxed according to the band it falls into.
A director taking a salary of £12,570 and dividends of £40,000 in 2026/27 would pay approximately £4,821 in income tax on the dividend portion alone, assuming no other income. That figure is higher than it would have been before the 2026 dividend tax rate increase.
Our tax tables for 2025/26 are a useful single reference point for key rates and thresholds, and our guide to UK income tax gives a fuller explanation of how the bands work when you have multiple sources of income.
How the Dividend Allowance Has Changed
The reduction in the dividend allowance has been one of the most important changes affecting director shareholders. The allowance was £2,000 in 2022/23, reduced to £1,000 in 2023/24, and then reduced again to £500 from 2024/25 onwards.
| Tax Year | Dividend Allowance | Tax-Free Dividends Lost vs 2022/23 |
|---|---|---|
| 2022/23 | £2,000 | Baseline |
| 2023/24 | £1,000 | £1,000 |
| 2024/25 | £500 | £1,500 |
| 2025/26 | £500 | £1,500 |
| 2026/27 | £500 | £1,500 |
For a higher rate taxpayer in 2026/27, the reduction from £2,000 to £500 means £1,500 more dividend income is now exposed to tax. At the higher dividend rate of 35.75%, that is an additional tax cost of £536.25 compared with having the old £2,000 allowance.
This does not make dividends unattractive, but it does mean directors should no longer assume that a historic salary and dividend split is automatically still optimal.
Speaking to an accountant Stockport business owners use for joined-up tax advice means you can model the full picture for your specific income level rather than estimating.
The Optimal Salary Level in 2026/27
The question of what salary a director should draw from their limited company is one of the most common tax planning discussions, and the right answer depends on your exact circumstances.
There are three salary points directors commonly consider.
The first is the Secondary Threshold for employer National Insurance, which is £5,000 per year in 2026/27. At this level, the company does not pay employer National Insurance and the director does not pay employee National Insurance. However, this salary is below the Lower Earnings Limit, so on its own it does not secure a qualifying year for State Pension purposes.
The second is the Lower Earnings Limit, which is £6,708 per year in 2026/27. A salary at this level can secure a qualifying year for National Insurance purposes without employee National Insurance being due. However, because it is above the employer Secondary Threshold, employer National Insurance can be due on the amount above £5,000 unless the company can use the Employment Allowance.
The third is the personal allowance, which remains £12,570. At this level, there is no income tax on the salary if the director has no other income using the personal allowance, and employee National Insurance is not payable because the salary is not above the employee Primary Threshold. However, employer National Insurance is due on the salary above the £5,000 Secondary Threshold unless covered by the Employment Allowance. At a salary of £12,570, the employer National Insurance cost is £1,135.50 before corporation tax relief.
The company normally receives corporation tax relief for salary and employer National Insurance where the cost is wholly and exclusively for the business. That deduction reduces the effective cost, but the right answer still depends on the company’s corporation tax rate, profit level, Employment Allowance position and the director’s wider income.
If you have not already reviewed your Employment Allowance position, this is the right time to do so. Some companies can use it to cover employer National Insurance, but companies where the only employee paid above the Secondary Threshold is also a director are usually excluded. If your company has other employees or more than one paid director, the position should be checked carefully.
Our Take-Home Pay Calculator helps you model different salary levels quickly.
Dividends, Corporation Tax and the Combined Tax Rate
One of the key features of trading through a limited company is that company profits are taxed first through corporation tax before being distributed as dividends. This means you need to look at the combined tax position, not just the dividend tax rate.
For a company paying the small profits corporation tax rate of 19%, profits distributed to a basic rate dividend taxpayer face corporation tax first and then dividend tax on the post-tax profit. In 2026/27, that produces a combined effective tax rate of approximately 27.7% for basic rate dividends. For a higher rate dividend taxpayer, the combined rate is approximately 48% where the company pays corporation tax at 19%.
If the company pays corporation tax at the main rate of 25%, the combined effective tax rate is higher. For a basic rate dividend taxpayer, the combined rate is approximately 33.1%. For a higher rate dividend taxpayer, it is approximately 51.8%.
This is why the company’s own corporation tax position matters. The limited company advantage is no longer as simple as comparing a low salary and dividend strategy against sole trader income tax. The answer depends on whether profits are extracted immediately, retained in the company, reinvested, paid into pensions, or used to build business value.
Working with a corporate tax accountant who can model these scenarios for your specific income level means you are making decisions based on actual numbers rather than general principles.
Our Corporation Tax Calculator gives you a quick estimate of your company’s tax liability, and how to calculate corporation tax explains the mechanics in detail.
The Personal Allowance Trap at £100,000
For directors whose total income is approaching or exceeding £100,000, there is a particularly expensive tax problem to navigate. The personal allowance of £12,570 is tapered away at a rate of £1 for every £2 of adjusted net income above £100,000, and is eliminated entirely at £125,140.
This trap catches both salary and dividends when calculating adjusted net income. The widely quoted 60% effective marginal rate applies to ordinary income taxed at 40% because each extra £1 of income also removes 50p of personal allowance. With dividends, the effective marginal rate is different, but still high because dividend tax is combined with the effect of losing personal allowance.
For directors in this position, pension contributions are often one of the most effective planning tools. Pension contributions can reduce adjusted net income, which may help preserve some or all of the personal allowance. Employer pension contributions made by the company can also be efficient where they are commercially justified and properly structured.
Our Self-Employed Tax Calculator models the effect of pension contributions on your overall tax position, and it is worth running the numbers before making your final decision about how much to draw from your company each year.
Using Your Spouse’s Dividend Allowance
If your spouse or civil partner is also a genuine shareholder in your company, they have their own £500 dividend allowance and their own tax bands. Distributing dividends between shareholders can be a legitimate tax planning strategy where the shareholding is properly structured and reflects real ownership.
The key point is that the arrangement must be genuine. Shares should be properly issued or transferred, dividend rights should follow the share rights, and company records must support the position. Informal income shifting without the right share structure can create problems.
Any changes to shareholding need to be properly documented with the right company secretarial paperwork. You should also consider whether different share classes, voting rights, alphabet shares or transfers between spouses are appropriate for your circumstances.
This is another area where directors loan accounts planning connects to the broader question of how money moves between the company and its shareholders. Getting these structures right requires a coherent approach rather than treating each element in isolation.
Dividend Vouchers and Company Records
Every dividend payment should be supported by proper company records, including evidence that the company had sufficient distributable reserves at the time the dividend was declared. Dividend vouchers should be prepared and retained, and board approval should be documented.
This is not just administration. It protects the tax treatment of the payment. If payments to directors are not documented properly, HMRC may question whether they were dividends, salary, loans or something else. That can create unexpected tax, PAYE, National Insurance or director’s loan account issues.
Keeping your company records in good order is therefore directly connected to the tax efficiency of your dividend strategy. Professional bookkeeping services that include dividend documentation as part of the record-keeping process ensure you are always in a position to demonstrate that dividends were properly declared and authorised.
If your bookkeeping is messy or behind, reconstructing which payments were dividends and which were salary at year-end is not only stressful but can produce errors that attract HMRC attention. Our bookkeeping checklists for UK small businesses give a practical structure for staying on top of this throughout the year.
Small business bookkeeping records also explains what documentation you need to hold and for how long.
Reporting Dividends on Your Self Assessment Return
If you complete a self assessment tax return, you must include your dividend income on it. This includes dividends from your own limited company, even where some or all of the dividend is covered by the dividend allowance.
If tax is due on your dividends, you may need to register for Self Assessment or contact HMRC so the tax can be collected correctly. Directors who take a mixture of salary and dividends commonly need Self Assessment support, particularly where dividends take them into higher rate tax, affect child benefit, reduce personal allowance, or interact with other income.
If you are a director taking both salary and dividends and you are not currently filing a Self Assessment return, it is worth reviewing your position. Getting a UTR number and registering for Self Assessment may be the first step if you have not already done so.
Your P60 covers your salary income but does not include dividends. Both need to be reflected correctly in your overall personal tax position, and the figures need to reconcile with your company’s accounts and payroll records.
The Interaction With Payroll
For directors who employ staff as well as paying themselves, the payroll picture is increasingly complex. The employer National Insurance rate remains 15% in 2026/27, and the Secondary Threshold remains £5,000 per year for most employees. This affects both staff wages and any director salary above that threshold.
Managing the director’s own remuneration and the wider payroll in a coherent way requires a joined-up approach. Stockport payroll services that handle director and staff payroll together can identify planning opportunities and risks that might be missed if the two are managed separately.
Understanding 5 payroll problems small employers can avoid is particularly relevant for directors who are managing payroll alongside their other responsibilities.
If the business is growing and you have recently taken on staff for the first time, what employers need to know before hiring their first employee covers the basics of setting up employer obligations correctly from the start.
Using Management Accounts to Plan Dividend Timing
One of the most useful things you can do as a director is use management accounts to plan when and how much to draw as dividends, rather than making ad hoc withdrawals and trying to work out the tax position afterwards.
Dividends can only be paid from distributable profits. If the company does not have sufficient distributable reserves at the time the dividend is declared, the dividend may be unlawful. That can create tax and legal complications and may require repayment.
A monthly management accounts service gives you the up-to-date view of your distributable reserves and your company’s profitability that you need to make these decisions correctly. How management accounts help directors control business spending is directly relevant here, as is the management accounts vs year-end accounts comparison, which explains why annual accounts alone are not sufficient for decisions that need to be made month by month.
The 3 accounting reports every limited company owner should review regularly includes the profit and loss account, balance sheet and cash flow statement as the three essentials, and all three are relevant to dividend planning.
Xero reporting for owners explains how to use your accounting software to pull these reports quickly and accurately, and how Xero can make it easier to stay on top of cash flow covers the cash dimension, which matters when dividend payments reduce the company’s cash position.
Using Xero to Track Your Remuneration Picture
Xero accounting software makes it easier to see your company’s profitability and available reserves during the year. For directors managing a salary and dividend strategy, this visibility is invaluable.
You can see your cumulative drawings, company profit to date and projected year-end position without waiting until year-end accounts are prepared. This helps avoid overdrawn director’s loan accounts, unlawful dividends and unexpected tax bills.
The 5 common Xero mistakes worth avoiding include incorrectly coding dividend payments, which can distort your profit and loss account and make your reported position inaccurate. Getting the coding right matters both for management information and for the accuracy of your year-end accounts.
Inheritance Tax and Dividend Planning
For directors building wealth within their company, the interaction between dividend strategy and inheritance tax planning is worth keeping in mind.
Shares in a qualifying trading company may qualify for Business Property Relief for inheritance tax purposes, but the rules are not automatic. Investment companies, surplus cash and excepted assets can reduce or prevent relief. From April 2026, the Business Property Relief landscape has also changed, with full relief capped for many estates and 50% relief applying above the relevant allowance.
This creates a tension between extracting money efficiently for personal use and retaining it within the company for longer-term planning. Money retained in a qualifying trading company may form part of an asset that attracts relief, but money extracted as dividends and held personally usually sits within your personal estate unless it is spent, gifted or otherwise planned for.
Our guide to 3 inheritance tax reliefs families often overlook covers BPR and other reliefs that are often missed in estate planning conversations, and it is worth reading alongside any remuneration planning discussion for longer-established businesses.
Is a Limited Company Still the Right Structure?
The cumulative effect of the reduced dividend allowance, higher employer National Insurance, frozen personal allowances and corporation tax changes means that for some sole traders and partnerships, the case for incorporation is less clear-cut than it used to be. For others, particularly those who reinvest profits, limit personal drawings, employ staff or need limited liability, the advantages may remain strong.
Reviewing your structure periodically is worth doing, particularly when tax rules change. Our overview of sole trader advantages and disadvantages compared to a limited company gives a balanced starting point for that conversation, and reduce corporation tax covers the allowances and reliefs that can make the limited company route more efficient for eligible businesses.
For directors considering much more fundamental changes to where their business is based, our move business to dubai from uk advisory service provides a clear overview of what operating in a lower-tax jurisdiction genuinely involves and whether it is a realistic option for your type of business.
Cash Flow and Dividend Payments
Dividends are paid from distributable reserves, but they also need cash behind them. This sounds obvious, but it is a source of genuine difficulty for directors who conflate company profitability with available cash.
A profitable company can still run short of cash if customers are slow to pay, stock has been purchased, tax is due, loans are being repaid, or working capital is tied up. Drawing dividends without understanding cash flow can leave the company unable to meet its obligations.
How poor invoice tracking can damage your cash flow is a relevant read for any director who finds themselves wanting to draw dividends but unsure whether the cash is actually there. Getting your invoicing and debtor management in order directly affects how freely you can draw dividends without creating cash flow problems for the business.
The cash vs accrual accounting distinction is also worth understanding in this context, because your profit on an accruals basis and your cash position can look very different, particularly if you have significant debtors or creditors.
FAQs: Dividend Tax in 2026
What is the dividend allowance for 2026/27?
The dividend allowance is £500 for 2026/27. This is the amount of dividend income taxed at 0% each year. It still uses part of your tax band.
What rate of tax do I pay on dividends above the allowance?
Dividends above the £500 allowance are taxed at 10.75% if they fall within the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. The band your dividends fall into is determined by your total income including dividends.
Do I need to report dividends from my own company on a tax return?
If you complete a Self Assessment return, dividends from your own limited company must be included. If dividend tax is due and you are not currently in Self Assessment, you may need to register or contact HMRC so the tax can be collected correctly.
What salary level should I take as a director?
The optimal salary depends on your individual circumstances, including your other income, whether your company qualifies for the Employment Allowance, your State Pension record and your company’s corporation tax position. Common salary points include £5,000, £6,708 and £12,570, but the right answer should be calculated specifically.
Can my spouse receive dividends from my company?
If your spouse or civil partner is a genuine shareholder with properly issued shares, they can receive dividends according to their share rights. Any arrangement that lacks proper substance or documentation can be challenged.
What happens if I pay a dividend that exceeds my company’s distributable reserves?
A dividend paid in excess of distributable reserves may be unlawful. It may need to be repaid and can create unexpected tax, legal and accounting complications. Checking your distributable reserves before each dividend payment is essential.
Are dividends subject to National Insurance?
No. Dividends are not subject to employee or employer National Insurance contributions. This is one reason salary and dividend planning remains popular, although the overall tax saving has narrowed.
Can I pay dividends monthly?
Yes, provided each payment is properly authorised, supported by a dividend voucher, and the company has sufficient distributable reserves at the time. Monthly dividends are common, but they should still be documented correctly.
Get Your Remuneration Strategy Right for 2026
The combination of a smaller dividend allowance, higher dividend tax rates, higher employer National Insurance and frozen personal allowances means that getting your salary and dividend strategy right in 2026/27 matters more than it did a few years ago. An approach that was optimised three or four years ago may not be the most efficient one today.
At U&W Chartered Accountants, we work with limited company directors across Stockport and beyond to structure their remuneration efficiently and stay on top of their personal and corporate tax obligations. Whether you need a full review of your salary and dividend approach, support with your Self Assessment return, or help with your company’s accounts, we are here to help.
Find out more about our team on our about page or reach us directly via our contact page. You can request an instant quote for your limited company right now to get started.
