What Has Actually Changed — and Why It Matters

The increase was confirmed in the Autumn Budget 2025 and came into effect on 6 April 2026. The government’s stated rationale is alignment: salary is subject to National Insurance, dividends are not, and the Treasury has been gradually narrowing that advantage for years. The tax-free dividend allowance has already been cut from £5,000 in 2016 to just £500 today. This latest rise continues that trend.

For a director on the standard low-salary, high-dividend structure — typically a salary up to the National Insurance threshold with the remainder taken as dividends — the practical impact is a meaningful increase in personal tax. A director drawing £37,700 in dividends in the basic rate band, for example, will pay roughly £750 more in tax this year than last year, purely as a result of this change. For higher rate taxpayers drawing larger dividends, the additional cost will be greater still.

What makes this particularly significant is the wider context. Corporation Tax has already risen for many companies. Income tax thresholds are frozen until 2031, meaning more income is pulled into higher bands each year simply through wage growth. The cumulative effect on director-shareholders has been substantial, and the dividend increase adds another layer on top.

The New Rates at a Glance

Does It Still Make Sense to Take Dividends?

Yes — for most directors, dividends remain the more tax-efficient way to extract profits, even at the new rates. Dividends are paid from post-corporation-tax profits and carry no National Insurance liability, which still makes them advantageous compared to taking a higher salary. The gap has narrowed, but it has not closed.

That said, the decision is no longer as straightforward as it once was. Several factors now shape the optimal approach for each individual director:

In some cases — particularly where a company is paying corporation tax at the higher 25% rate — it can actually become more tax-efficient to take a higher salary than was previously the case. This is a reversal from the position most directors have operated under for years, and it is worth examining whether your current structure still makes sense.

How Pension Contributions Can Help

One of the most effective ways to reduce the impact of higher dividend tax rates is through pension contributions — and this applies whether contributions are made personally or directly by the company.

Employer pension contributions are particularly powerful for limited company directors. When your company pays directly into your pension, those contributions are treated as a business expense, reducing your company’s taxable profits before corporation tax is applied. The money never passes through your personal income at all, so no dividend tax, no income tax, and no National Insurance arises on it.

To illustrate: a higher rate director-shareholder whose company contributes £30,000 directly into their pension instead of distributing it as dividends could save a significant amount in combined corporation tax and personal dividend tax — potentially well into five figures, depending on the company’s corporation tax rate and the director’s marginal rate. The pension grows free of tax, and withdrawals in retirement can often be taken at a lower tax rate than applies during peak earning years.

Other Approaches Worth Considering

Pension contributions are the most widely applicable planning tool, but they are not the only one. Depending on your circumstances, other approaches may also be relevant:

Why Now Is the Right Time to Review

The start of a new tax year is the best possible moment to look at this. Your remuneration structure for 2026/27 is not yet fixed — decisions made now, at the beginning of the year, will apply to twelve months of income. Decisions made in January will apply to just the last few weeks.

More broadly, the direction of travel on dividend taxation is clear. The allowance has fallen from £5,000 to £500 in a decade. Rates have increased. Thresholds are frozen. Directors who review their structure annually — and adjust it to reflect current rates rather than working from a plan set five years ago — consistently pay less tax than those who do not.

This is not about finding loopholes. Every tool mentioned in this article is a legitimate, government-sanctioned way of managing your tax position. Pension contributions, salary optimisation, spousal shareholdings, ISAs — these exist precisely because the government wants to encourage saving and investment. Using them properly is good financial management, not tax avoidance.

If you are a limited company director and have not reviewed your remuneration structure since the new rates came in, get in touch with us. A conversation now is worth considerably more than a catch-up in January.