Dividend Tax Up 2%: The New Best Split for Directors

On 6 April 2026 the dividend tax rates went up two percentage points. If you run a limited company and pay yourself the way most directors do — a small salary, the rest in dividends — you are now paying more for exactly the same profit.

The question every director is asking: does the old playbook still work? We ran it through the engine. The short answer is yes, but by a smaller margin.

What actually changed

One point worth nailing down, because it has been widely misreported: the additional rate did not change. It stays at 39.35%. Only the ordinary and upper rates moved, and only by 2 points each. In plain cash, that is £20 more tax per £1,000 of dividends.

The new optimal split at £50,000 profit

Take a single-director company with £50,000 of profit before the director's salary. The engine sweeps every salary from £0 to £20,000 and finds the one that leaves the most in the director's pocket:

The split is worth £3,564.16 a year over paying yourself entirely in salary. Even after the rise, that is not close.

The 2-point increase costs this director roughly £589 a year on £29,463.75 of dividends. Annoying — but nowhere near enough to make salary the better route.

And at £100,000 profit

Higher profits push dividends into the upper rate, where the increase bites harder (35.75% rather than 10.75%):

Still ahead by £3,832.22. The rise costs about £1,345 a year here, and the effective tax rate across company and person reaches 34.8%.

Why dividends still win

It comes down to a tug-of-war between two forces.

Salary has one big advantage: it is a deductible expense. Every pound of salary reduces the profit subject to corporation tax, so it carries relief worth 19% to 26.5%. Dividends get no such relief — they come out of profit that has already been taxed.

But salary attracts National Insurance from both directions: 8% employee NI above £12,570, and — the decisive number — 15% employer NI above just £5,000. Dividends attract no National Insurance at all.

For a single-director company that 15% is unavoidable, because such a company cannot claim the £10,500 Employment Allowance. A business whose only employee liable for employer NI is a sole director is specifically excluded. If you take one thing from this article, take that: the allowance you keep reading about almost certainly does not apply to you.

The optimum therefore lands at a salary of about £12,500 — roughly the personal allowance. At that level the salary is fully deductible against corporation tax, generates no income tax and no employee NI, and still earns you a State Pension qualifying year. Go higher and you start paying 8% NI and 20% income tax on money that could have left as a dividend more cheaply.

Following the money at £50,000

It is worth watching a single pound travel the whole route, because the double-taxation of dividends is what people find counter-intuitive.

Your company starts with £50,000 of profit. It pays you £12,500.00 as salary, and hands HMRC £1,125.00 of employer NI on the slice above the £5,000 secondary threshold. Both come out before corporation tax is worked out. What remains is charged at the 19% small profits rate, costing £6,911.25.

That leaves £29,463.75 available to distribute. On the personal side, your salary is inside the personal allowance, so it attracts no income tax and no employee NI at all. The dividends then get the £500 allowance at 0%, and everything above it is taxed at the new 10.75% ordinary rate until your total income passes £50,270 — producing a dividend tax bill of £3,106.08.

Add it up and total tax across the company and the individual is £11,142.33, an effective rate of 22.3% on the original profit. You keep £38,857.67. Note that dividends really are taxed twice — once as corporation tax inside the company, again as dividend tax in your hands — and the structure still wins, purely because it dodges National Insurance on both sides.

Who should reconsider

The split still wins, but three groups should look again.

• Directors with a second employee. If someone else on your payroll is above the secondary threshold, your company may become eligible for the Employment Allowance — and the optimal salary rises.
• Anyone who does not need all the cash. This whole analysis assumes you extract every pound of post-tax profit this year. You may not have to. Leaving profit in the company, or paying it into a pension, can beat both routes outright — employer pension contributions are corporation-tax deductible and escape NI and dividend tax entirely.
• Higher-rate dividend takers. At 35.75%, the upper rate is now within touching distance of the 40% income tax rate. The gap that made dividends obviously superior is narrowing, and for some structures the answer is genuinely finely balanced.

Frequently asked questions

What salary should I take in 2026/27?

Roughly the personal allowance — around £12,500. It is corporation-tax deductible, triggers no income tax or employee NI, and preserves your State Pension qualifying year.

Did the additional dividend rate go up?

No. It remains 39.35%. Only the ordinary and upper rates rose, by 2 percentage points each.

Is the £500 dividend allowance a real exemption?

Not quite. It is a zero-rate band: the first £500 is taxed at 0%, but it still consumes basic-rate band space, so it does not shift the rest of your dividends into a lower band.