Dividend tax has become noticeably more expensive for company directors. The dividend allowance is now just £500, compared with £5,000 in 2016/17, and dividend tax rates have risen again for 2026/27. For directors taking regular dividends from a limited company, the combined effect of a smaller allowance, higher tax rates and frozen income thresholds means the cost of extracting profits needs careful review.
For 2026/27, dividend tax is charged at 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. These rates apply after the £500 dividend allowance has been used. The additional rate threshold remains £125,140, while the higher rate threshold remains £50,270 for most taxpayers outside Scotland.
Our post on UK dividend tax explained and allowances covers the rules in more detail, and our guide to dividend tax gives useful background on how the rates have changed over recent years.
Why dividends now need more planning
Dividends are still useful for company directors, but they are not automatically the simple low-tax answer they once appeared to be. A dividend is paid from company profits after Corporation Tax. That means the company may already have paid Corporation Tax before you personally pay dividend tax.
For 2026/27, Corporation Tax remains 19% for companies with profits up to £50,000 and 25% for companies with profits over £250,000. Marginal relief applies between those figures, so many profitable owner-managed companies pay an effective rate somewhere between 19% and 25%.
Once Corporation Tax and dividend tax are considered together, profit extraction becomes much more expensive, especially for directors already in the higher rate band. This is why the salary, dividend and pension mix should be reviewed each year rather than repeated automatically.
Need Help With Your Accounts Or Tax?
Whether you need support with self assessment, VAT returns, payroll, bookkeeping, CIS, company accounts or corporation tax, Asmat & Co Accountants can provide clear, practical advice for your business or personal finances.
The salary strategy still matters
Paying yourself a director’s salary remains a core part of limited company tax planning, but the right amount depends on your company’s wider payroll position.
A salary up to the personal allowance of £12,570 can be efficient because it normally creates no income tax or employee National Insurance for the director. However, employer National Insurance now starts at the Secondary Threshold of £5,000 per year and is charged at 15% for 2026/27. That means a salary of £12,570 can create employer National Insurance of around £1,135, although this cost is deductible for Corporation Tax.
If your company qualifies for the Employment Allowance, a higher salary strategy may be more attractive. If you are the sole director and the only employee, the company will usually not qualify for the Employment Allowance, so the calculation needs to be checked properly.
Our post on director pay: salary vs dividends covers this in detail. Our payroll services also make sure director salaries are processed correctly through RTI, including the correct National Insurance treatment.
For the mechanics of how NI interacts with pay, our post on national insurance contributions is a useful reference.
Pension contributions are increasingly valuable
With dividend tax rising, company pension contributions have become even more attractive for directors who do not need to extract all profits immediately.
An employer pension contribution paid directly by the company is usually deductible against Corporation Tax, provided it is wholly and exclusively for business purposes and reasonable in the circumstances. It does not create employee National Insurance, employer National Insurance or income tax at the point of contribution.
The standard annual allowance remains £60,000 for 2026/27, although the tapered annual allowance and money purchase annual allowance can reduce this for some individuals. Carry forward may also be available where unused allowances exist from the previous 3 tax years.
Pensions are not suitable for money you need now, because access is restricted. The normal minimum pension age is due to rise from 55 to 57 in April 2028. Tax-free lump sums are also subject to limits, so directors should take pension advice before making large contributions.
For directors with retained company profits and long-term retirement plans, pensions can be one of the most tax-efficient extraction routes. Our post on cash flow forecasting for small businesses can help you model how much the company can afford to contribute without creating pressure elsewhere.
Spousal shareholding can still help
If your spouse or civil partner is a genuine shareholder in your company, they have their own £500 dividend allowance, personal allowance and basic rate band. Where they have little or no other income, dividends paid to them may be taxed at a lower rate than dividends paid to a higher-earning director.
This can still create a meaningful saving, but the arrangement must be genuine. The shares should carry real rights, and the spouse or civil partner should have a genuine economic interest in the company. HMRC can challenge arrangements that appear artificial or purely tax-driven.
If you already have a family share structure, make sure dividends are paid correctly, board minutes are prepared, dividend vouchers are issued and both spouses report the income properly where required. Our post on self-assessment tax returns explains how dividend income should be reported.
Timing dividends across tax years
With the dividend allowance now only £500, timing is more important. If you are deciding whether to declare a dividend near the end of a tax year, check whether your available basic rate band is better this year or next year.
For example, if taking a dividend now pushes you into the higher rate band, delaying part of it until the next tax year may reduce the tax rate on that amount. The saving can be significant because the gap between the basic dividend rate of 10.75% and the higher dividend rate of 35.75% is now 25 percentage points.
Dividends must also be legal. They can only be paid from distributable profits. Directors should avoid paying dividends where the company does not have sufficient retained profit, because unlawful dividends can create tax and company law problems.
Our post on personal tax covers how income sources interact across the tax year and affect your tax bands.
Do not ignore director loans
Some directors use director loan accounts when extracting funds, but this needs careful management. An overdrawn director loan account can trigger tax charges if not repaid on time. From 6 April 2026, the Section 455 charge on loans to participators is 35.75%.
This makes informal extraction through a director loan account even riskier. If the company lends money to a director, the repayment date, benefit-in-kind position and company tax impact all need to be understood before the funds are taken.
How Asmat and Co Can Help
As experienced limited company accountants based in Slough, Asmat and Co review director extraction strategies so your salary, dividend and pension mix reflects the current tax year’s rates and your personal income position.
We prepare company accounts, handle your director’s self-assessment tax return, and produce financial reports that give you the clarity to decide when and how much to extract.
Our small business accountants team also supports clients from our Reading office across Berkshire.
Our post on what an accountant does for an SME gives a realistic picture of the value good year-round advice delivers on decisions exactly like this one.
Frequently Asked Questions
Can I carry unused dividend allowance forward?
No. The £500 dividend allowance is an annual allowance. If you do not use it in the tax year, it cannot be carried forward.
Do dividends affect my personal allowance?
Yes. Dividends count towards your total income. If your total income exceeds £100,000, your personal allowance starts to taper. Pension contributions can sometimes help manage income in this band, but advice should be taken.
What records do I need for dividends?
Every dividend should be supported by a board minute and a dividend voucher. This applies even in a one-director company.
Review Your Strategy Before the Tax Year Gets Away From You
The 2026/27 tax year has made dividend extraction more expensive for many directors. The right answer is not to stop using dividends altogether, but to review the full mix of salary, dividends, pension contributions and timing.
Contact Asmat and Co today for a straightforward review of your director extraction strategy.
Need Help With Your Accounts Or Tax?
Whether you need support with self assessment, VAT returns, payroll, bookkeeping, CIS, company accounts or corporation tax, Asmat & Co Accountants can provide clear, practical advice for your business or personal finances.
