Increased dividend tax rates are coming – what they mean for company directors:

Increased dividend tax rates are coming – what they mean for company directors:

In April 2026, we are set to see a range of tax changes – including the long-awaited arrival of Making Tax Digital and an increase in dividend tax rates.

The move will see the rates of tax payable on dividends from shares, rise by two percentage points to 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers.

For additional rate taxpayers, the rate will remain at 39.35%.

For a typical director taking around £50,000 per year in income via a mix of salary and dividends, the basic rate increase could see them pay around £600 more in tax every year. 

In this article, we look at the differences between taking dividends or a salary, and what this latest tax rise means.

PAYE vs dividends – tax codes and low salaries:

If you own a limited company, there are several ways you can extract profits from your business. For the purposes of this analysis, we’ll concentrate on the two main methods: taking a salary and paying yourself in dividends.

The way a salary works will be familiar to anyone who has worked in the past. In the case of company directors, you can pay a salary to yourself and you will have to pay income tax and national insurance as usual.

Dividends, meanwhile, are a share of any profits paid to business shareholders. Unlike a salary, the business must be making an after-tax profit in order to pay dividends. However, because they don’t come with national insurance payments, dividends are usually a more tax efficient way to take money out of a business.

The first £500 of any dividend payments are tax free – a situation which will remain the same in 2026/27.

Some company directors will pay themselves a modest salary through PAYE and then take the balance of their earnings as dividends. This is a strategy aimed at being as tax efficient as possible.

Why? Here is a quick breakdown of how this method works:

• Every person in the UK is entitled to a tax-free Personal Allowance (currently £12,570 and remaining at that amount in 2026/27). Company directors could set their salary at around this level to take advantage of that tax free amount while maintaining access to their state pension.
• Any extra payments are then made through dividends, which – as we have seen – are exempt from national insurance. This can lead to savings over a year.
• Dividends are taxed at dividend tax rates after corporation tax is applied. These rates are often lower than income tax rates (the basic rate will remain at 20% in 2026/27). 
  
  

The impact of dividend tax hikes:

The government’s announcement that dividend tax will be increasing from the 2026/27 tax year has left some questioning whether the tax treatment of the self-employed is unfair and unbalanced.

In its post-Budget analysis, IPSE- The Self-Employment Association, said the new measure will hit 1.2 million owners of the UK’s smallest companies “particularly hard”.

Their view was that: “With personal allowances frozen for longer and dividend income taxed more heavily, this adds significant financial pressure and risks discouraging entrepreneurship at a time when it is most needed.”

The fear is the increase will penalise those who take commercial risk and manage inconsistent profit levels, with the government effectively taxing the same income stream twice.

It is a concern that was reflected in Qdos’ 2025 Self-Employed Survey, where more than 20% of respondents said they would be considering moving to PAYE because of the rise.

What is certain is that it is essential for company directors to review their renumeration strategy.