For many owner-managed businesses, dividends remain a core part of how profits are extracted. While this change won’t upend the system overnight, it does reduce the tax efficiency of a strategy that many directors have relied on for years. As a result, now is a sensible point to pause and reassess how you pay yourself.

What’s Actually Changing

From April 2026:

• The dividend ordinary rate increases from 8.75% to 10.75%
• The dividend upper rate rises from 33.75% to 35.75%
• The dividend additional rate remains at 39.35%
• The tax-free dividend allowance stays at £500

The rate you pay depends on your total taxable income and where your dividends sit within the tax bands.

These rates apply only to dividends—salary, bonuses, pension income and savings are all taxed differently and interact with dividends in important ways.

Why This Matters for Profit Extraction

Historically, dividends have offered a tax-efficient alternative to salary, which is why many directors use a blend of a modest salary topped up with dividends. That logic still broadly holds, but the margin is tightening.

As dividend tax rises, the “default” approach becomes less reliable, and the right extraction strategy becomes far more personal. Income levels, household earnings, pension planning, future borrowing, and even lifestyle goals all start to matter more.

A Simple Working Example

Let’s assume a director takes a £12,500 salary, set deliberately to use the personal allowance, and £70,000 in dividends – a structure that will feel familiar to many established owner-managed businesses.

After the £500 dividend allowance, £69,500 is taxable. Because total income exceeds the basic rate threshold, those dividends are split between the ordinary and higher dividend rates.

2025/26 position (current rates):

• £37,700 taxed at 8.75% = £3,299
• £31,800 taxed at 33.75% = £10,733
  Total dividend tax: £14,032

2026/27 position (from April 2026):

• £37,700 taxed at 10.75% = £4,052
• £31,800 taxed at 35.75% = £11,369
  Total dividend tax: £15,421

That’s an increase of £1,389 per year, with no change in profits or extraction strategy. This may not be headline-grabbing, but it’s a clear erosion of take-home pay.

What’s Worth Reviewing Now

Ahead of April 2026, it may be worth revisiting:

• Whether your salary/dividend mix is still the most efficient for your circumstances
• Whether it’s sensible to bring forward dividends (where cash flow and reserves allow)
• The wider implications of switching income types, including cash flow, NIC, and pension contributions

There’s no one-size-fits-all answer here. What works well for a single-director consultancy may be completely wrong for a growing business with multiple shareholders or future funding plans.

A Final Thought

Profit extraction isn’t just about tax rates, it’s about control, predictability, and alignment with your wider financial plans. Dividend tax changes are simply a reminder that strategies should evolve as the rules (and your business) change.

If you’d like to review how you currently take money from your company, or sense-check your plans for 2026/27, we’re happy to help. A short conversation now can often prevent expensive habits from becoming entrenched later.