If you take dividends from your limited company, your tax bill has just gone up. Dividend tax rates rose by 2 percentage points from 6 April 2026, following the Autumn 2025 Budget, and the change affects almost every director who extracts profit this way.
In this guide we set out the dividend tax rates for 2026/27, explain how the £500 allowance really works, and walk through what a typical director will pay under the new numbers.
What Are the Dividend Tax Rates for 2026/27?
For the 2026/27 tax year, the first £500 of dividend income is covered by the dividend allowance and taxed at 0%. Above that, the rate depends on which Income Tax band the dividends fall into:
Basic rate band (total income £12,571 to £50,270): 10.75%, up from 8.75%
Higher rate band (£50,271 to £125,140): 35.75%, up from 33.75%
Additional rate band (over £125,140): 39.35%, unchanged
The 2 point rise means an extra £20 of tax for every £1,000 of dividends above the allowance for basic and higher rate taxpayers. A director drawing £40,000 in dividends within the basic rate band pays around £800 more this year than last, from exactly the same profit.
How the £500 Dividend Allowance Works
The dividend allowance is often misunderstood. It is a nil-rate band, not a deduction: the first £500 of dividends is taxed at 0%, but it still uses up £500 of whichever tax band your income sits in. It does not give you extra basic rate room.
It has also shrunk dramatically. The allowance was £5,000 as recently as 2017/18, fell to £2,000, then £1,000, and has sat at £500 since April 2024. Combined with the rate rises, dividend income is now taxed more heavily than at any point since the current system began.
How Dividends Are Taxed: The Top Slice Rule
Dividends are always treated as the top slice of your income. Salary, pension and rental income fill your tax bands first, then savings interest, and dividends sit on top. This is why a director with a £45,000 salary and a seemingly modest £10,000 dividend finds most of that dividend taxed at 35.75% rather than 10.75%: the salary has already used most of the basic rate band. To see how your own mix of income plays out, try our dividend tax calculator.
A Worked Example for 2026/27
Take a director who pays themselves a salary of £12,570 (matching the Personal Allowance) and draws £30,000 in dividends, with no other income.
The salary is covered entirely by the Personal Allowance, so no Income Tax is due on it. The first £500 of dividends falls within the dividend allowance at 0%. The remaining £29,500 sits comfortably within the basic rate band and is taxed at 10.75%, giving a dividend tax bill of £3,171.25 for the year.
Under last year’s 8.75% rate, the same dividends would have cost £2,581.25, so the Budget change adds £590 to this director’s bill. You can compare different salary levels using our salary after tax calculator.
Is Salary Plus Dividends Still Tax Efficient?
For most owner-managed companies, yes, although the gap has narrowed. Dividends still carry no National Insurance, which remains a meaningful advantage over an equivalent salary taxed at 20% plus 8% employee NI. A small salary combined with dividends therefore remains the standard approach for many directors.
That said, the right structure depends on your circumstances. Spouse or civil partner shareholdings can make use of a second £500 allowance and basic rate band, and the timing of dividend payments across tax years can smooth your liability. Both need care: share arrangements must reflect genuine ownership, and HMRC looks closely at structures set up purely for tax. This is exactly the sort of planning our taxation services team handles for director clients.
Reporting Dividends to HMRC
Dividends above the £500 allowance must be reported to HMRC. If you already file a Self Assessment return, all dividend income goes on the return. If dividends exceed £10,000, Self Assessment is required, and if you are not yet registered you must do so by 5 October following the end of the tax year. Dividends held within an ISA remain tax free and do not need reporting.
How Taylors LLP Can Help
Getting the salary and dividend balance right is one of the most valuable pieces of planning a director can do, and the April 2026 rate rise makes it worth revisiting even if your structure has worked well for years. As experienced accountants in Barnet working with limited company directors across North London, we review profit extraction strategies, prepare the paperwork behind compliant dividend payments, and make sure nothing is left on the table.
This article is based on tax rules for the tax year beginning 6 April 2026 and is intended as general guidance only, not personal tax advice. Rates and thresholds can change, and the right approach depends on your individual circumstances. Contact us for help.
