If you are a director who takes a combination of salary and dividends, this one is for you. From 6 April 2026, taxes on dividend income have risen. The ordinary rate has moved from 8.75% to 10.75%, while the upper rate has jumped from 33.75% to 35.75%.
This is the second dividend tax increase in recent years, and it is worth taking a fresh look at whether your current pay setup is still as tax-efficient as it could be.
📊 What does this mean in practice?
The increases apply after the £500 dividend allowance. So if you are a higher rate taxpayer drawing £40,000 in dividends a year, you will now pay 35.75% on the bulk of that, compared to 33.75% before. That is an extra £800 per year on that level of income alone, which soon adds up.
Basic and higher dividend tax rates have climbed by 2% from April 2026, affecting the balance between salary and dividend extraction strategies for business owners.
💡 Why does the salary/dividend balance matter?
Most owner-managed businesses pay directors a modest salary, often around the personal allowance or the secondary NIC threshold, and top up with dividends. This is still a tax-efficient approach overall, but the margin has narrowed again. The right mix depends on your total income, your company's profits, and your personal tax position.
It is also worth factoring in that the Capital Gains Tax rate for those claiming Business Asset Disposal Relief has also risen, from 14% to 18% from April 2026, so exit planning for directors is worth revisiting too.
✅ What to review now
- Check whether your current salary and dividend split is still optimal given the new rates
- Make sure your company's dividend payments are properly documented and declared
- If you have a spouse or civil partner who is a shareholder, review whether income is being split as tax-efficiently as possible
- Think ahead to the end of the tax year and whether there are any planning opportunities before then
A small change to how you draw income can make a meaningful difference to your tax bill over the course of a year. If you would like us to model your current position and compare the options, your Client Manager would be happy to help.