The recent Budget confirmed that dividend tax rates will rise from April 2026, with both the ordinary and upper rates increasing by 2%.

For many small and medium-sized companies, dividends remain a key method for owners to draw income. With higher tax rates on the way, it’s likely that your approach to pay and profit extraction will need re-evaluating for the 2026/27 tax year.

What Exactly Is Changing?

From April 2026:

  • The dividend ordinary tax rate will increase from 8.75% to 10.75%.

  • The dividend upper tax rate will rise from 33.75% to 35.75%.

  • The dividend additional rate will stay at 39.35%.

  • The £500 tax-free dividend allowance remains unchanged.

The tax rate applicable to your dividends depends on your total income and the sources it comes from. These rates apply solely to dividend income – salary, bonuses and savings interest are taxed under separate rules.

What This Means for Profit Extraction

Dividends have typically been more tax-efficient than salary, which is why many directors and shareholders opt for a modest salary supported by higher dividend payments.

With dividend tax rates increasing, this balance may shift. The most efficient extraction strategy can vary significantly between directors, particularly once income levels, additional earnings, pension contributions and company profitability are considered.

It may therefore be worth assessing:

  • Whether a revised combination of salary and dividends could now be more tax-efficient.

  • Bringing forward dividends before April 2026, where suitable.

  • How cash flow might be affected if you choose to take a higher salary instead of dividends.

If you’d like to reassess how you draw funds from your company, or understand how the forthcoming changes to dividend tax might influence your take-home pay, please get in touch. We can help you consider the available options and ensure your remuneration remains as tax-efficient as possible.