Dividend tax rates rising in April 2026: What does it mean for profit extraction?

The recent Budget confirmed that dividend tax rates will increase from 6 April 2026. For dividends that fall within an individual’s basic and higher rate tax band the tax rate will increase by 2%.

For many small and medium-sized companies, dividends play a key role in any form of remuneration planning. With the income tax rates rising on dividends, pay and profit extraction strategies will likely need a fresh look for 2026/27.

What’s actually changing

From April 2026:

• The dividend basic rate tax band increases from 8.75% to 10.75%.
• The dividend higher rate tax band increases from 33.75% to 35.75%.
• The dividend additional tax rate remains at 39.35%.
• The 0% dividend band will remain at £500, this covers the first £500 of dividend income an individual receives in a tax year.

The rate you pay on your dividends will depend on the amount of other sources of taxable income earned as these income sources will typically use up your basic and higher rate tax bands before dividend income is taxed.

What the changes mean for profit extraction

As dividends are subject to lower income tax rates than salary payments, many directors/shareholders have traditionally adopted a mix of a low salary and higher dividend income.

However, with income tax rates on dividends increasing, income extraction strategies may need to be revisited. The best extraction strategy for one director may look quite different for another, as there are many different factors to consider such as:

• What level of income needs to be extracted.
• Does the individual have other sources of taxable income.
• Is the individual looking to make pension contributions.

It may therefore be worth reviewing:

• Whether a different mix of salary and dividends best suits your current needs.
• Bringing forward dividends before April 2026, where appropriate.
• The impact on cash flow if you switch to taking a larger salary instead of dividends.

For example, if you currently draw a salary equivalent to the Personal Allowance, with a further £75,000 drawn in dividends, the tax charge will increase by £1,490 in 2026/27, being 2% of the dividends subject to basic rate and higher rate tax. This additional tax charge can amount to nearly £2,500 in some circumstances. The additional tax may make salary a slightly more attractive option, but it is essential to consider the position taking into account the remuneration mix of salary, dividends, pension contributions and benefits in kind.

If you want to explore the various ways to extract cash from your company, or see how the upcoming dividend tax changes could affect your take-home pay, please do get in touch. We can guide you through the options and help you make sure your remuneration is as tax-efficient as possible.  Please contact Joe Wilson on 023 8046 1237 or email Joe Wilson.