Limited company directors are getting used to another tax rise, which could cost the average business owner thousands of pounds.
From 6 April 2026, dividend tax rates for basic and higher-rate taxpayers have risen by two percentage points.
The new rates for the 2026/27 tax year onwards are:
- Basic rate: 8.75% increasing to 10.75%
- Higher rate: 33.75% increasing to 35.75%
- Additional rate: unchanged at 39.35%
- Dividend allowance: remaining at £500
For most owner-managed companies, where profits are typically taken as a combination of salary and dividends, this represents another step in a long series of tax rises for small business owners.
How dividend tax has shifted over time
The April 2026 increase sits alongside a series of changes going back to the 2016 overhaul of dividend taxation.
Over the past decade, the dividend tax-free allowance has been reduced from £5,000 to £500.
The 2023 Corporation Tax hike also resulted in thousands of extra pounds in tax for limited company owners, as the main rate was increased from 19% to 25% (with marginal rates applying to profits between £50,000 and £250,000).
Taken together, the overall tax cost of extracting profits from limited companies has risen quite noticeably.
The gap between operating through a company and being taxed as an employee is narrower than ever.
Dividends received within ISAs or pension wrappers are unaffected by these changes, which still makes them relevant for longer-term planning.
What the tax increase looks like in real terms
A two-point rise may not sound dramatic in isolation, but the impact is significant, especially for higher-earning directors.
For a director taking somewhere between £30,000 and £50,000 in dividends, the additional tax will usually run into several hundred pounds annually.
At higher income levels, the effect is more noticeable.
Once income moves above the £100,000 threshold, the loss of the personal allowance creates an effective 60% marginal rate, which compounds the impact of higher dividend tax. In that range, the increase can run into the low thousands.
The Treasury expects the change to raise around £2.1 billion.
Unlike PAYE changes to income tax or National Insurance, the burden here falls largely on shareholders and business owners.
How directors are likely to respond
Most directors won’t change their remuneration plans solely on the basis of this tax hike – it becomes another factor to consider when setting salary, dividend and pension contribution levels.
Some potential adjustments include:
- Leaving more profit in the company rather than drawing down funds immediately.
- Using employer pension contributions to extract value in a more tax-efficient way.
- Calculating the most tax-efficient salary and dividend mix, and
- Looking again at whether the limited company structure is still your best option in the long term. If your work falls outside IR35, it is still generally more tax-efficient than becoming a sole trader.
It’s also worth remembering that dividend tax is only one layer of the overall picture. Profits have already been subject to Corporation Tax before they are distributed, so the combined tax cost is often higher than it first appears.
For directors with steady profits year after year, even small increases like this tend to compound over time, particularly where little income can be sheltered through allowances or pension contributions.
The long-term effect of tax rises on owner-managers
On its own, a 2% increase is manageable.
The problem for directors is the cumulative effect of repeated changes over time.
Alongside the dividend tax and Corporation Tax rises over the past decade, there have also been restrictions on the flat-rate VAT scheme (the limited cost trader test), and the caustic effects of the off-payroll rules for contractors.
For most directors, the sensible approach is to look at the full-year position rather than react to a single change. You can read more in this salary and dividends guide.
If you have any questions about the dividend tax rise or how to extract profits from your limited company, make sure you get in touch with your accountant.