Dividend Tax Has Increased: What Limited Company Directors Need to Know about Dividend Tax 2026/27

Dividend Tax 2026/27 is one of the most important personal tax changes for owner-managed companies this year. From 6 April 2026, the ordinary dividend rate increased from 8.75% to 10.75%, while the upper dividend rate increased from 33.75% to 35.75%. For limited company directors who regularly extract profits through dividends, the same level of drawings can therefore lead to a higher personal tax bill.

The increase does not mean that dividends are no longer useful. Dividends can still form part of a tax-efficient remuneration strategy because they are not subject to employee or employer National Insurance in the same way as salary. However, Dividend Tax 2026/27 means directors should no longer assume that last year’s salary-and-dividend strategy remains the best option.

Dividend Tax 2026/27 should be looked at as part of that wider picture rather than as a standalone tax.

This guide explains what has changed, how Dividend Tax 2026/27 works, the effect on directors in different tax bands, common mistakes to avoid and the planning opportunities that may still be available during the 2026/27 tax year.

Dividend Tax 2026/27: The new rates from 6 April 2026

The main change to Dividend Tax 2026/27 is a two percentage point increase in the ordinary and upper dividend tax rates. For dividends received between 6 April 2026 and 5 April 2027, the ordinary rate is 10.75%, the upper rate is 35.75% and the additional rate remains 39.35%.

For comparison, during 2025/26 the ordinary rate was 8.75% and the upper rate was 33.75%. Therefore, Dividend Tax 2026/27 increases the tax cost for both basic-rate and higher-rate dividend taxpayers.

Under Dividend Tax 2026/27, the dividend allowance remains £500. This means that up to £500 of dividend income can be taxed at a 0% dividend rate, although the allowance still uses part of the tax band in which the dividend falls. The £500 allowance is not an additional Personal Allowance.

A basic-rate shareholder receiving £10,000 of taxable dividends above the allowance could now pay £1,075 under Dividend Tax 2026/27, compared with £875 under the previous ordinary rate. That is an extra £200.

A higher-rate shareholder receiving £10,000 of taxable dividends could pay £3,575 under Dividend Tax 2026/27, compared with £3,375 previously. Again, that is an additional £200.

The additional dividend rate has not increased. A shareholder whose dividends are taxed entirely at the additional rate continues to face a 39.35% rate. Nevertheless, Dividend Tax 2026/27 may still affect the overall extraction strategy where some income falls into lower bands.

How dividend taxation works for a limited company director

A limited company is a separate legal entity from its shareholders. When the company makes a profit, it may first have Corporation Tax to pay. Only profits available for distribution can then be paid out as dividends.

For Dividend Tax 2026/27 planning, remember that dividends are not normally deductible when calculating the company’s taxable profits. The company therefore receives no Corporation Tax deduction simply because it pays a dividend.

Once a valid dividend is paid to the shareholder, the individual’s personal tax position determines the amount of Dividend Tax 2026/27 due. The rate depends on where the dividend falls after taking account of other taxable income.

Dividends are generally treated as the top slice of income. Salary, pension income, rental profits, self-employment profits and other taxable income can therefore use lower tax bands before dividends are considered. This is why Dividend Tax 2026/27 can vary substantially between two directors receiving exactly the same dividend.

Under Dividend Tax 2026/27, a director with little or no other income may have most dividends taxed at 10.75%. Another director with employment or property income may find the same dividend falls partly or wholly into the 35.75% band.

Alongside Dividend Tax 2026/27, the standard Personal Allowance remains £12,570. For taxpayers in England, Wales and Northern Ireland, the basic-rate band remains £37,700 after allowances. Scottish rates differ for non-dividend income, although dividend tax rates apply across the UK.

Dividend Tax 2026/27 should therefore be calculated using the shareholder’s complete income position rather than only the amount received from the company.

The £500 dividend allowance explained

The dividend allowance remains £500 for 2026/27. Some directors mistakenly believe this means the first £500 of dividends is ignored completely for tax purposes. That is not quite correct.

Under Dividend Tax 2026/27, the allowance applies a 0% rate to £500 of dividend income, but those dividends still use tax-band capacity. This becomes relevant when the shareholder is close to the higher-rate threshold.

Suppose a director has already used almost all of the basic-rate band before receiving company dividends. The £500 allowance can sit within the remaining band, leaving more of the taxable dividend exposed to the upper rate. Dividend Tax 2026/27 must therefore be calculated carefully rather than simply deducting £500 and ignoring it.

The allowance also covers dividends from other taxable investments. It is not £500 per company or per shareholding. If a director receives dividends from several companies or an investment portfolio, the amounts are combined when working out Dividend Tax 2026/27.

Dividend Tax 2026/27 generally does not apply to dividends received inside an ISA, and they do not use the dividend allowance. That distinction can matter where a director also holds a significant personal investment portfolio.

Dividend Tax 2026/27: Worked examples for directors

Examples show how Dividend Tax 2026/27 can affect different extraction levels. These illustrations are simplified and assume the individual has a full Personal Allowance and no unusual reliefs.

Example 1: £30,000 of dividends

Assume a director receives a salary of £12,570 and dividends of £30,000, with no other taxable income.

The salary is covered by the Personal Allowance. The first £500 of dividends is covered by the dividend allowance. That leaves £29,500 taxed at the ordinary Dividend Tax 2026/27 rate of 10.75%.

Dividend Tax 2026/27 is £3,171.25 in this example.

Under the previous 8.75% rate, tax on the same £29,500 would have been £2,581.25. Dividend Tax 2026/27 therefore increases the bill by £590 in this example.

Dividend Tax 2026/27 therefore creates a noticeable increase even for a director remaining within the basic-rate band.

Example 2: £40,000 of dividends

Assume the same £12,570 salary but dividends of £40,000.

Under Dividend Tax 2026/27, the £500 dividend allowance uses part of the basic-rate band. Of the remaining dividend, £37,200 falls within the ordinary rate and £2,300 falls within the upper rate.

Under Dividend Tax 2026/27, £37,200 at 10.75% gives £3,999, while £2,300 at 35.75% gives £822.25. Total dividend tax is therefore £4,821.25.

Using the previous dividend rates, the equivalent tax would have been £4,031.25. Dividend Tax 2026/27 increases the liability by £790.

Dividend Tax 2026/27 also shows why directors should monitor cumulative income during the tax year. A larger dividend can push part of the payment into a substantially higher tax band.

Example 3: director with other employment income

Assume a director already has £50,270 of employment income and then receives £20,000 of dividends.

For Dividend Tax 2026/27, the basic-rate band has effectively been used by the employment income. After the £500 dividend allowance, £19,500 falls into the upper dividend rate.

Dividend Tax 2026/27 at 35.75% produces tax of £6,971.25. At the former 33.75% upper rate, the tax would have been £6,581.25.

The increase is £390. More importantly, the example shows that other income can completely change the result. Dividend Tax 2026/27 cannot be planned correctly by looking only at company drawings.

The £100,000 Personal Allowance trap

Dividend Tax 2026/27 planning matters above £100,000 because the Personal Allowance is withdrawn by £1 for every £2 of excess income. The Personal Allowance can eventually be reduced to nil.

Dividends count when calculating adjusted net income. A director near £100,000 can therefore face more than the headline Dividend Tax 2026/27 rate because additional dividends may also cause a loss of Personal Allowance.

Dividend Tax 2026/27 can therefore contribute to a particularly high effective marginal tax rate within the taper zone. Directors in this position should calculate the overall cost before taking large dividends.

Pension contributions and Gift Aid can affect adjusted net income in appropriate circumstances. Dividend Tax 2026/27 planning around £100,000 should therefore consider these areas together rather than focusing solely on the dividend rate.

Make sure the company can legally pay the dividend

Dividend Tax 2026/27 planning does not override company law. A dividend may only be paid where sufficient distributable profits are available.

Dividend Tax 2026/27 does not change the fact that cash in the bank does not automatically mean a company can pay a dividend. The company may still owe VAT, PAYE, Corporation Tax, suppliers or other liabilities, and the accounting reserves may not support the amount proposed.

Before declaring a dividend, directors should review up-to-date accounts or reliable management information. Dividend Tax 2026/27 only applies to a valid dividend; simply withdrawing money and calling it a dividend later can create problems.

Keep appropriate dividend vouchers and board minutes or written resolutions. The records should identify the shareholder, amount, date and shares to which the dividend relates.

Good documentation also helps prevent confusion between dividends, salary, expense reimbursements and director’s loan movements.

Director’s loan accounts need closer attention

Dividend Tax 2026/27 also makes director’s loan accounts important: money that is not salary, a valid dividend, an expense repayment or another identified payment may be posted to the director’s loan account.

If that loan becomes overdrawn and remains outstanding beyond the relevant deadline, a close company may face a Section 455 tax charge. The Section 455 rate for relevant loans made from 6 April 2026 is 35.75%, reflecting the increase in the dividend upper rate.

Dividend Tax 2026/27 should therefore not encourage directors to replace dividends with informal loans without considering the consequences. A loan can also potentially create a benefit-in-kind issue where it exceeds the relevant limits and insufficient interest is charged.

Regularly reconciling the director’s loan account can prevent surprises. Personal payments should be identified promptly, and any planned repayment or dividend used to clear a loan should be supported by proper records and sufficient reserves.

Employer pension contributions may become more attractive

Alongside Dividend Tax 2026/27, employer pension contributions can be worth considering where directors do not need all company profits immediately.

A genuine employer pension contribution can normally be made without creating an immediate Dividend Tax 2026/27 liability for the director. It may also qualify for Corporation Tax relief where the wholly and exclusively test is satisfied.

Pension planning is not simply a way to avoid Dividend Tax 2026/27. Annual allowance rules, available carry forward, pension access restrictions and the director’s retirement objectives need to be considered.

However, where a director would otherwise take a large higher-rate dividend simply to move cash out of the company, comparing that option with a pension contribution can be useful.

Dividend Tax 2026/27 makes this comparison even more relevant because the upper dividend rate has increased to 35.75%.

Consider genuine spouse or civil partner share ownership

Under Dividend Tax 2026/27, spouses or civil partners who genuinely own shares are each taxed on dividends arising on their own shares.

This may allow two people to use their respective dividend allowances and tax bands. Dividend Tax 2026/27 can therefore produce very different outcomes depending on the legal ownership of shares and each shareholder’s other income.

However, shares should not be transferred or restructured simply by moving numbers on a spreadsheet. Legal ownership, the rights attached to each share class, company articles, settlements legislation and Capital Gains Tax implications may need consideration.

Where a spouse or civil partner is already a genuine shareholder, annual dividend planning should take both tax positions into account. Dividend Tax 2026/27 makes unused basic-rate band capacity potentially more valuable.

Professional advice is sensible before changing ownership purely for tax reasons.

Think carefully about dividend timing

For Dividend Tax 2026/27, a dividend is taxed in the tax year in which it is treated as received under the relevant rules. Timing can therefore determine whether a dividend falls into a lower or higher personal tax band.

If a director has unusually high income in 2026/27 but expects materially lower income in 2027/28, it may sometimes be sensible to consider whether a distribution can genuinely be deferred.

This planning must be completed before the transaction. Dividends should never be backdated simply to achieve a preferred tax result.

The company must also have sufficient distributable reserves when the dividend is declared. Commercial needs and cash flow come first.

Where a dividend is being considered close to 5 April, preparing a projected personal tax calculation before declaration can help show whether the timing produces a meaningful tax difference.

Dividend Tax 2026/27: Practical planning checklist

For Dividend Tax 2026/27, directors should start by forecasting total personal income for the full tax year. Include salary, dividends, rental income, pensions, employment income and other taxable sources.

Next, estimate how much of the proposed dividend will fall within the ordinary, upper and additional dividend bands. This gives a realistic Dividend Tax 2026/27 liability before the money is spent.

Review whether the company has sufficient distributable profits. This planning is irrelevant if the company cannot lawfully declare the proposed dividend.

Compare salary, dividends and employer pension contributions rather than assuming one method is automatically best. The company’s Corporation Tax rate and National Insurance position can materially affect the result.

Check whether the director is approaching the higher-rate threshold or the £100,000 Personal Allowance taper. Dividend Tax 2026/27 can become significantly more expensive around these points.

Where there are multiple genuine shareholders, calculate each person’s tax position separately. Dividend Tax 2026/27 is based on the shareholder receiving the income.

Reconcile director’s loan accounts before the company year end and before the relevant Section 455 deadline. It is only one of the possible tax costs of extracting money.

Finally, reserve cash for Self Assessment. Dividend Tax 2026/27 is a personal liability even where the dividend came from a company with strong cash reserves.

Final thoughts

Dividend Tax 2026/27 has increased the personal tax cost of extracting company profits for many limited company directors. The ordinary rate is now 10.75%, the upper rate is 35.75% and the additional rate remains 39.35%. The dividend allowance remains £500.

Dividend Tax 2026/27 does not mean directors should stop paying dividends. It means that salary, dividends, pension contributions, retained profits and other extraction methods should be reviewed together.

Dividend Tax 2026/27 is particularly important for directors close to the higher-rate threshold, those with income above £100,000, directors with rental or employment income and shareholders taking substantial distributions.

Accurate bookkeeping is equally important. A dividend must be supported by distributable reserves and properly documented. An informal withdrawal cannot simply be labelled a dividend after the event.

Planning before a dividend is declared can help avoid unexpected tax bills. Dividend Tax 2026/27 should therefore be reviewed throughout the year rather than only when the Self Assessment return is prepared.

Every director’s circumstances are different. A personalised calculation can compare the tax cost of salary, dividends and pension contributions and identify how Dividend Tax 2026/27 affects the amount ultimately retained personally.

For directors who rely heavily on dividends, the most important message is simple: do not automatically repeat last year’s extraction plan. Dividend Tax 2026/27 has changed the numbers, and a fresh review can help ensure company profits are extracted in a way that remains compliant, practical and tax-efficient.

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