If you run a limited company and you are also its owner, how you take money out is a decision you make every year, whether you think about it or not. For 2026/27 it deserves more thought than usual, because the rules moved in April.
What changed in April 2026
Following the Autumn Budget 2025, dividend tax rates rose by two percentage points from 6 April 2026. For 2026/27 the rates are 10.75% for basic rate taxpayers, 35.75% for higher rate and 39.35% for additional rate, with the dividend allowance remaining at £500.
That is not a dramatic change on a small dividend. On a substantial one it is real money, and it narrows the gap between taking profit out of a company and simply trading as a sole trader. Anyone still planning extraction on 2025/26 assumptions will underestimate their bill.
The three moving parts
Corporation tax. Unchanged for 2026/27: 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between. That relief produces an effective rate of around 26.5% on each additional pound of profit inside the band, which is higher than the headline main rate and surprises people regularly.
Salary. A salary is a deductible expense for the company, so it reduces corporation tax. It also attracts employer National Insurance at 15% above the £5,000 secondary threshold. The Employment Allowance can offset up to £10,500 of employer NI for eligible employers, but sole director companies with no other employees are specifically excluded, which catches a lot of one-person businesses.
Dividends. Not deductible for the company, so they come out of profit that has already borne corporation tax, but taxed at lower personal rates than salary and with no National Insurance.
The reason a salary and dividend mix usually beats either extreme is that each element is taxed differently, and the efficient answer is a combination rather than a maximum of one. Where the optimum sits depends on your profit level, your other income, and whether you actually need the money this year.
The questions that decide your mix
- Do you need the cash? This matters more than anything else. Profit left in the company is taxed once, at corporation tax rates. Profit extracted is taxed twice. If you can leave it, leaving it is usually the strongest position, and it is where the real advantage of incorporating now sits.
- What is your total income? Dividends sit on top of your other income and are taxed at whichever band they fall into. Crossing into the higher rate band changes the calculation materially.
- Is anyone else a shareholder? A spouse or partner who is genuinely a shareholder has their own allowances and bands. This has to be set up correctly and commercially, not retrofitted, but where it is legitimate it is effective.
- Are you building a State Pension record? A salary at the right level preserves your qualifying years. Dividends do not count toward it at all, and a pure dividend strategy can quietly cost you pension entitlement.
- Have you considered pension contributions? Employer pension contributions are generally an allowable company expense and avoid both corporation tax and personal tax at the point of payment. For higher earners this is frequently more efficient than either salary or dividends, and it is the option most often overlooked.
The rules you cannot bend
Dividends can only be paid out of distributable profits. If the company has not made enough profit, it is not a dividend, and HMRC can recharacterise it as salary or as a director's loan, both of which are worse outcomes. Board minutes and dividend vouchers are not paperwork for the sake of it, they are the evidence that the payment was what you say it was.
Taking money out as you go and sorting the classification at year end is the single most common problem we inherit from new clients. It is fixable, but it is considerably cheaper not to do it.
What to do now
Review the mix at the start of the tax year rather than the end, once you have a reasonable view of the year's profit. Waiting until March means working with what is left rather than planning what should happen.
If you have not revisited your extraction since before April, it is worth half an hour. The rates moved, and the answer may have moved with them.
Sources: HMRC rates and thresholds for 2026/27; dividend rate changes announced at Autumn Budget 2025.
Important: this article is general information only and is not legal, tax or financial advice. It reflects the rules in force at the date of publication, which can change. Blueband Accountancy Ltd is not responsible for any financial decisions made based on this article. Please speak to us about your own circumstances before acting on anything you read here.
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