What changed on 6 April 2026
Basic rate
8.75% → 10.75%
Up 2 percentage points
Higher rate
33.75% → 35.75%
Up 2 percentage points
Dividend allowance
£500
Unchanged — still frozen
If you run a UK limited company and pay yourself through a combination of salary and dividends, your tax bill just went up. On 6 April 2026, HMRC raised the basic rate of dividend tax from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. The additional rate stays at 39.35%. The £500 dividend allowance is unchanged.
For a director drawing £75,000 in dividends, that is an extra £1,490 a year landing in HMRC's pocket instead of yours. For a higher earner drawing £100,000, the extra bill is £1,990. This article explains exactly what changed, how much it costs you at every level, whether the salary-plus-dividend model still wins, and five legitimate strategies to reduce the hit.
This change only affects directors and shareholders who receive company dividends. If you work inside IR35 or through an umbrella company, your income is PAYE and none of this applies to you. See our inside vs outside IR35 guide if you are unsure which category you fall into.
The new dividend tax rates: full breakdown
Dividend income sits on top of your other income when HMRC calculates which band it falls into. If your salary already uses your basic rate band, most of your dividends are taxed at the higher rate — even if the dividend amount itself looks modest.
UK dividend tax rates: 2025/26 vs 2026/27
Rates apply to dividend income after the £500 annual dividend allowance
| Band | Income threshold | 2025/26 rate | 2026/27 rate | Change |
|---|---|---|---|---|
| Basic rate | £501–£50,270 | 8.75% | 10.75% | +2% ↑ |
| Higher rate | £50,271–£125,140 | 33.75% | 35.75% | +2% ↑ |
| Additional rate | Above £125,140 | 39.35% | 39.35% | No change |
| Dividend allowance | First £500 | Tax-free | Tax-free | No change |
How much more are you paying? Cost by dividend level
Both the basic and higher rates rose by exactly 2 percentage points. That makes the extra cost straightforward to calculate: 2% of your taxable dividends (total dividends minus the £500 allowance). The table below shows the annual and monthly impact at common contractor extraction levels.
Extra dividend tax per year — 2026/27 vs 2025/26
Director with £12,570 salary · dividend allowance applied · all remaining profit as dividends
| Annual dividends | Extra tax this year | Extra per month | Profile |
|---|---|---|---|
| £30,000 | +£590 | +£49/mo | Typical small PSC |
| £50,000 | +£990 | +£83/mo | Mid-range extraction |
| £75,000 | +£1,490 | +£124/mo | Standard senior contractor |
| £100,000 | +£1,990 | +£166/mo | High earner |
Annual extra tax by dividend level
Is salary plus dividends still the right approach?
Yes — but the margin has narrowed, particularly for higher-rate taxpayers. The comparison is between two effective rates on the same £10,000 of company profit.
Dividend route (new higher rate): Pay Corporation Tax at 19% = £1,900 taken by HMRC. Remaining £8,100 paid as a dividend, taxed at 35.75% = £2,896. Total tax = £4,796. You keep £5,204.
Salary route (higher rate): Pay Employer NI at 15% = £1,500. Remaining £8,500 paid as salary, income tax at 40% = £3,400, Employee NI at 2% = £170. Total tax = £5,070. You keep £4,930.
Per £10,000 of company profit — what you actually keep
Higher-rate taxpayer · 19% Corporation Tax · England/Wales
Dividends — new rate (higher band)
Best option for most directors
£5,204
Effective rate: ~48.0%
Dividends — old rate (higher band)
Pre-April 2026 baseline
£5,366
Effective rate: ~46.3%
Salary (higher rate + employer NI 15%)
Least efficient above basic threshold
£4,930
Effective rate: ~50.7%
The real opportunity: Neither salary nor dividends is optimal for all your profit. Routing a portion directly into a pension via an employer SIPP contribution produces a far better outcome than either — because it avoids Corporation Tax, dividend tax, and National Insurance entirely.
Five legitimate strategies to reduce the hit
None of these are aggressive tax avoidance. They are standard tax planning tools available to any limited company director, and HMRC would expect a well-advised director to use them.
Route profits into an employer SIPP — before Corporation Tax
A direct employer SIPP contribution from your limited company is the most powerful lever available. It is a deductible business expense, so it reduces your Corporation Tax bill and is never subject to dividend tax or National Insurance. For a higher-rate taxpayer, £20,000 routed into a SIPP costs the company £20,000 but saves roughly £3,800 in Corporation Tax and avoids £7,150 in dividend tax — a total saving of over £11,000 compared with taking the same amount as a dividend.
How to make a direct employer SIPP contributionUse a spouse or civil partner's allowances and lower rate
If your spouse or civil partner is a lower-rate taxpayer or has unused dividend allowance, dividend income shifted to them is taxed at their marginal rate — potentially zero or 10.75% rather than 35.75%. This can be done through a share restructure (creating different share classes, known as alphabet shares) or by genuinely gifting shares. HMRC's settlement legislation applies, so the arrangement must be commercially real: your spouse should hold shares outright and receive dividends in their own right.
Maximise allowable business expenses to reduce distributable profit
Dividend tax applies to profits after Corporation Tax — so every pound of genuinely allowable expense reduces the pool from which dividends can be paid. Common contractor expenses that directors sometimes overlook: home-as-office costs (if you work from home and have a formal arrangement), professional development and subscriptions, business mileage at the HMRC approved rates, and specialist equipment or software used wholly for business.
Time your dividend payments across tax year boundaries
If you have flexibility over when you declare dividends, you can manage which tax year they fall into. This is particularly useful if your income varies year to year, or if you expect to be a basic-rate taxpayer in a future year (e.g. taking time off contracting). Dividends are taxed in the year they are paid, not when the profit was earned. A dividend declared on 5 April 2027 is a 2026/27 liability; one declared on 7 April 2027 is a 2027/28 liability.
Consider an ISA wrapper for non-company investment income
If you invest the after-tax profits you draw from your company, holding those investments inside a Stocks and Shares ISA means any future dividends or gains from those investments are tax-free. This does not reduce the tax on the initial dividend extraction from your company, but it prevents a second layer of dividend tax on what you do with the money afterwards. The ISA annual allowance is £20,000 per person.
If the dividend tax rise is making you reconsider your IR35 status
For contractors whose clients recently crossed the £15M small company threshold, self-determination rights have returned. Outside IR35 through your own PSC still gives you access to the salary-plus-dividend structure, the employer SIPP contribution route, and the full range of legitimate tax planning tools. Our IR35 small company threshold guide covers exactly who qualifies and how to confirm your status.
The most effective response to the dividend tax rise: employer SIPP contributions
Our Outside IR35 SIPP calculator shows you exactly how much more wealth accumulates in the pension vs the dividend route for your specific company profit level, including the Corporation Tax saving and the wealth multiplier over time.
Frequently asked questions
Does the April 2026 dividend tax rise affect contractors operating inside IR35?
No. If you work inside IR35, your income is processed under PAYE — income tax and National Insurance — not as dividend income. The dividend tax rise only affects people who extract profit from a limited company as dividends. That primarily means outside IR35 contractors operating through their own Personal Service Company, or directors of small trading companies. If you work through an umbrella company, your income is PAYE earnings and this change does not apply to you.
When exactly did the new dividend tax rates take effect?
The new rates took effect from 6 April 2026, the start of the 2026/27 UK tax year. Any dividends paid or received on or after this date are taxed at the new rates. Dividends paid before 6 April 2026 — in the 2025/26 tax year — are taxed at the old rates, even if the company profits they came from were earned after that date. If you were able to pay dividends before the end of March 2026, those are assessed under the old rules.
Is it still worth paying myself through dividends after April 2026?
Yes, for most directors. The comparison is: dividends at the higher rate cost a combined effective rate of around 48% on company profit (after Corporation Tax at 19% plus 35.75% dividend tax on what remains). A higher-rate salary costs around 51% on the same company profit once you account for employer NI at 15%, income tax at 40%, and employee NI at 2%. Dividends still win, but by a smaller margin than before — roughly £274 per £10,000 of profit extracted rather than £436 before the rate rise.
What is the single most effective way to reduce the dividend tax hit?
Routing company profits into a direct employer SIPP contribution before paying Corporation Tax. The contribution is a deductible business expense, so it reduces the company's taxable profit before CT is calculated and is never subject to dividend tax or NI. For a higher-rate contractor, every £10,000 diverted to the SIPP rather than taken as a dividend saves approximately £3,575 in dividend tax plus £1,900 in Corporation Tax — a combined improvement of over £5,000 per £10,000 of profit.
Has the £500 dividend allowance changed?
No. The dividend allowance remains at £500 for 2026/27. The first £500 of dividend income you receive each tax year is completely free of dividend tax, regardless of your marginal rate. This allowance has been heavily cut in recent years — from £5,000 in 2017/18 down to its current level — but the April 2026 changes did not alter it further. If you have a spouse or civil partner, each of you has a separate £500 allowance.
Does this change affect the additional rate (39.35%) at all?
No. The additional rate of dividend tax, which applies to dividend income above £125,140, remains unchanged at 39.35% for 2026/27. Only the basic rate (now 10.75%) and higher rate (now 35.75%) changed. If your total income including dividends exceeds £125,140, those dividends above that threshold continue to be taxed at 39.35%.
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