For many owner-managed businesses, taking a combination of salary and dividends has traditionally been a familiar way for directors to extract profits from their company.
From 6 April 2026, however, two of the main dividend tax rates increased. That does not mean dividends have suddenly become the wrong choice, but it does mean that directors should be careful about relying on a remuneration strategy simply because it has worked in previous years.
What changed on 6 April 2026?
For the 2026/27 tax year, dividend income above the available allowances is taxed at:
- 10.75% where the dividend falls within the basic-rate band;
- 35.75% where it falls within the higher-rate band; and
- 39.35% where it falls within the additional-rate band.
The basic and higher dividend rates have therefore increased by two percentage points compared with 2025/26. The additional dividend rate has remained unchanged.
The annual dividend allowance remains at £500.
What does the increase mean in practice?
The increase can look relatively small when expressed as two percentage points, but it becomes more noticeable as dividend drawings increase.
For example, if £20,000 of someone’s dividends were subject to one of the rates that increased by two percentage points, the rate change alone could represent an additional £400 of tax.
On £50,000, the equivalent difference would be £1,000.
These are deliberately simplified examples. The actual position will depend on the individual’s other income, available allowances and the tax bands into which the dividends fall.
Does this mean directors should take more salary instead?
Not necessarily.
There is rarely one salary-and-dividend calculation that is correct for every company director.
Salary can potentially give the company a corporation tax deduction, but PAYE and National Insurance must also be considered as this may increase the tax payable. Dividends are paid from profits available for distribution and so do not obtain the same corporation tax deduction.
A director’s wider circumstances can also make a substantial difference.
Those circumstances may include other employment or pension income, benefits, rental or investment income, available personal allowances, pension contributions, other shareholders and the level of profits available within the company.
The question should therefore not simply be:
“What is the most tax-efficient salary this year?”
A better question may be:
“What is the most appropriate way of extracting the money I need from my company, having considered the company and my personal tax position together?”
Dividends must still be lawful
Tax efficiency should never be considered separately from the underlying company-law and accounting position.
A company must have sufficient distributable profits before a dividend can properly be declared.
Business owners should therefore avoid treating transfers from the company bank account as dividends automatically. Where the appropriate paperwork has not been prepared or sufficient profits are unavailable, the accounting and tax treatment may be quite different.
Director’s loan accounts also deserve attention
Another area directors should be careful about is drawing money from their company before deciding how it will ultimately be treated.
Amounts taken which are neither salary, reimbursed business expenses nor valid dividends may pass through the director’s loan account.
This can have separate tax consequences and should not simply be corrected retrospectively by calling everything a dividend.
Our view
We know that cash flow can affect when directors are able—or choose—to take dividends. Rather than allowing drawings to continue automatically, we believe directors should consider their expected level of dividends in advance and review the position regularly, ideally at least quarterly. Before each dividend is paid, the company should have sufficient distributable profits to support it and the appropriate dividend documentation should be completed.
When reviewing dividends, it is also sensible to review salary and the director’s wider remuneration position at the same time. The most appropriate combination can change as tax rates, company profitability and personal circumstances change.
We also encourage directors to review their payslips each month. HMRC can amend a tax code during the tax year, which can change the amount of tax deducted and therefore the director’s net pay. Setting up a standing order for the same net salary each month without checking the underlying payslip can result in the wrong amount being withdrawn from the company.
Cash flow should always remain part of the conversation. A company must have sufficient distributable profits before paying a dividend, but we also believe directors should consider what the business needs to retain. Where commercially appropriate, building balance-sheet strength consistently over time can present a more stable financial picture than extracting profits heavily in one year and rebuilding reserves in the next. This may be particularly relevant where a business expects to seek external finance or is being prepared for a future sale.
What should directors do now?
For directors of owner-managed companies, 2026/27 is a sensible year to revisit the remuneration strategy rather than assuming that last year’s salary and dividend combination remains appropriate.
That review should consider both the company’s financial position and the director’s wider personal circumstances.
About this article
Written by: We Are Pi Chartered Certified Accountants
Reviewed by: Angelique Wright FCCA
Last reviewed: 3 September 2026
Sources and further guidance: HMRC and GOV.UK guidance on dividend taxation, Income Tax rates and allowances.
About We Are Pi
We Are Pi is a Buckinghamshire-based firm of Chartered Certified Accountants supporting owner-managed businesses, company directors and individuals with accounting, tax, compliance and business advisory services.
Important information: This article is intended for general information only and should not be treated as tax, accounting or other professional advice specific to your circumstances. Tax treatment depends upon individual circumstances and legislation and guidance can change.
Would you like to review how you take money from your company?
We Are Pi can review the interaction between your company’s profits, salary, dividends, director’s loan account and personal tax position as part of a wider remuneration review.
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