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From April 2026, dividend tax rates rose. For most directors, salary + dividends still beats a full PAYE salary, but the gap has narrowed. Here's a breakdown of the new rates, how the two approaches compare, and what else is worth considering before you change anything.
As confirmed by HMRC, the dividend tax rates for the 2026/27tax year are as follows:
The £500 dividend allowance remains in place, as does the £12,570 personal allowance on salary income (tapering down between £100,000 and £125,140). The government's rationale, as set out in HMRC guidance, is to narrow the gap between tax paid on employment income and tax paid on income from assets, since dividends, unlike salaries, don't attract National Insurance contributions.
For most directors, the answer is still no.
The reason is National Insurance. A PAYE salary attracts both employer and employee NI contributions, whereas dividends do not. Even with the April 2026 increase, that difference remains significant enough that the salary + dividends approach typically produces a lower overall tax burden.
The most common approach is to set the director's salary at exactly £12,570, the personal allowance threshold for 2026/27. Here's why that number matters:
At £12,570, you pay no income tax on your salary, because it sits exactly at the limit before tax kicks in. You also build up a qualifying year towards your State Pension and retain access to certain statutory benefits, without paying any employee National Insurance as your salary falls below the employee NI threshold.
The one cost at this level is employer National Insurance. A £12,570 salary generates approximately £1,136 in employer NI, paid by the company. However, for most single-director companies, this is outweighed by the corporation tax saving the salary creates. Salary is a deductible business expense, so it reduces the company's taxable profit and therefore its corporation tax bill. (Single director only PAYE payrolls, are not eligible for Employment Allowance)
Everything above £12,570 is then drawn as dividends from the company's post-tax profits, taxed at the new 2026/27 dividend rates.
The examples below compare salary + dividends against an equivalent all-salary approach, where the director extracts the same total value from the company in both cases. Figures use 2026/27 rates and assume a single director with no other income sources.
In the examples below, it is assumed that the Company has sufficient distributable reserves to make the Dividend payments. If you have any questions about your ability to pay dividends, then please do get in touch.
Total Director remuneration: £100,000
* The all-salary figure is set so that total company outgoings (salary + employer NI) match those of the salary + dividends strategy, making the comparison like-for-like.
Figures are illustrative. Individual circumstances vary and these examples do not account for factors such as pension contributions, Employment Allowance eligibility, or personal tax reliefs.
The April 2026 changes reduce the advantage of taking dividends, but salary + dividends still produces a better outcome at both profit levels shown. The margin narrows as profits rise, so if your income sits at the higher end, it's worth reviewing your specific numbers rather the gap is the same as it once was.
For directors running a company with a spouse or family member, the picture is closer still, particularly where Employment Allowance applies. Income splitting across two shareholders remains one of the most effective and legitimate ways to reduce the overall tax burden on a company's profits.
Tax efficiency matters, but it's not the only factor worth weighing up.
One situation worth keeping a close eye on: if you draw money from your company beyond your declared salary and dividends, this creates a director's loan. If the loan is not repaid within nine months of the end of your Corporation Tax accounting period, the company becomes liable to pay Corporation Tax at 33.75% (Section 455 tax) on the outstanding amount. That tax can be reclaimed once the loan is repaid, but the interest charged on it cannot.
There's an additional consideration if the loan exceeds £10,000 at any point in the year: HMRC requires the company to treat it as a benefit in kind, with Class 1 National Insurance deducted through payroll. This catches more directors than you might expect, particularly where drawings a read hoc or informal.
Keeping your loan account tidy, and understanding where it stands at all times, avoids an unwelcome bill.
The April 2026 dividend tax rise is a genuine change, and the right response is to review your position rather than assume nothing has shifted. For most directors, salary + dividends remains the most tax-efficient structure. But individual circumstances vary, and factors like upcoming mortgage applications, benefit entitlements, and R&D claims can all influence the right answer.
If you'd like to look at how these changes affect your specific situation, get in touch and we can walk through the options with you.
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