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Dividend Tax Rises 2 Percentage Points: How Much More You'll Pay at Every Day Rate
From 6 April 2026, dividend tax rates increased by 2 percentage points. The basic rate rose from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate stays at 39.35%. If you run a limited company and pay yourself mostly in dividends, this directly cuts your take-home pay. On a £500/day rate, that’s £1,569 less per year — or about £131 a month.
This is the latest in a series of dividend tax squeezes that have cost contractors thousands since 2016. Here’s exactly how it affects you, with real numbers at every common day rate.
Calculate your exact take-home pay with the new 2026/27 rates →
What actually changed
Only the dividend tax rates moved. Everything else — income tax bands, the personal allowance, Corporation Tax, National Insurance — stays frozen at 2025/26 levels.
| Dividend tax band | 2025/26 rate | 2026/27 rate | Change |
|---|---|---|---|
| Basic rate (up to £50,270) | 8.75% | 10.75% | +2pp |
| Higher rate (£50,271–£125,140) | 33.75% | 35.75% | +2pp |
| Additional rate (over £125,140) | 39.35% | 39.35% | No change |
| Tax-free dividend allowance | £500 | £500 | No change |
The additional rate was already raised to 39.35% in a previous Budget, so it didn’t move this time. But the basic and higher rate bands are where the vast majority of contractor dividends fall — so almost everyone is affected.
How much more you’ll pay: breakdown by day rate
All figures assume 232 working days, a £12,570 salary, and dividends taken from remaining profits. Outside IR35, through a limited company.
| Day rate | Annual gross | 2025/26 take-home | 2026/27 take-home | You lose |
|---|---|---|---|---|
| £300/day | £69,600 | £51,740 | £50,854 | £887/year |
| £400/day | £92,800 | £63,037 | £61,810 | £1,228/year |
| £450/day | £104,400 | £68,686 | £67,287 | £1,398/year |
| £500/day | £116,000 | £74,334 | £72,765 | £1,569/year |
| £600/day | £139,200 | £85,631 | £83,721 | £1,910/year |
The pattern is straightforward: the more you earn above the basic rate band, the more you lose. At £300/day, most of your dividends are taxed at the basic rate, so the 2pp increase costs you £887. At £600/day, a larger chunk of dividends spills into the higher rate band, costing you £1,910.
A contractor on a £500/day rate now pays £18,741 in dividend tax alone — up from £17,172 last year. That’s before Corporation Tax, which takes another £23,358.
Worked example: £500/day contractor
Here’s the full picture for a contractor earning £500/day outside IR35, taking a £12,570 salary with the rest as dividends.
| Step | Amount |
|---|---|
| Gross income (£500 × 232 days) | £116,000 |
| Less: salary | -£12,570 |
| Less: employer NI on salary | -£1,136 |
| Company profit | £102,295 |
| Less: Corporation Tax (marginal relief) | -£23,358 |
| Distributable profit (= dividends) | £78,936 |
| Less: dividend tax (2026/27 rates) | -£18,741 |
| Income tax on salary | £0 |
| Employee NI on salary | £0 |
| Annual take-home pay | £72,765 |
The dividend tax breaks down as:
- £37,200 taxed at the basic rate (10.75%) = £3,999
- £41,236 taxed at the higher rate (35.75%) = £14,742
- First £500 is covered by the dividend allowance (0%) = £0
Your situation may differ depending on expenses, pension contributions, and other income. Model your exact numbers here →
The dividend allowance has been quietly gutted
The rate increase is only half the story. The tax-free dividend allowance has shrunk dramatically:
| Tax year | Dividend allowance |
|---|---|
| 2016/17 – 2017/18 | £5,000 |
| 2018/19 – 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2024/25 onwards | £500 |
In 2017/18, a contractor could receive £5,000 in dividends tax-free. Today, that figure is £500. At the higher rate of 35.75%, the lost £4,500 of allowance alone costs you £1,609 per year. Combined with the rate increases over the same period, limited company contractors are paying significantly more than they were even a few years ago.
Is £12,570 still the optimal salary?
Yes. Despite the dividend tax increase, the optimal salary for most limited company directors remains at the personal allowance level of £12,570 in 2026/27. Here’s why:
- Income tax on salary: £0 (covered by the £12,570 personal allowance)
- Employee NI on salary: £0 (primary threshold is £12,570)
- Employer NI on salary: £1,136 (15% on earnings above the £5,000 secondary threshold)
If you increase your salary above £12,570, you’ll pay 20% income tax plus 8% employee NI on the extra — that’s 28% in combined tax and NI. Dividends above £12,570 are taxed at 10.75% (basic rate) or 35.75% (higher rate). For most contractors in the basic rate band, dividends are still cheaper than salary.
The maths only changes if you have other reasons to take a higher salary — mortgage applications, pension contribution headroom, or specific benefit entitlements. For pure tax efficiency, £12,570 remains the sweet spot.
What you can actually do about it
You can’t avoid the rate increase, but you can reduce the dividends you’re taxed on:
1. Pension contributions from your company
Employer pension contributions from your limited company are Corporation Tax deductible, not subject to National Insurance, and don’t count as personal income. They’re the single most tax-efficient way to extract value from your company. With the annual allowance at £60,000 (plus up to three years of carry-forward), there’s significant room here.
See how much you’d save with salary sacrifice →
2. Timing your dividends
If you’re close to a tax band boundary, consider whether taking dividends across two tax years would keep more income in the basic rate band. This is particularly relevant if your income varies year to year.
3. Splitting with a spouse
If your spouse or partner is a shareholder and has unused basic rate band, dividends paid to them are taxed at their marginal rate. On £37,200 of basic rate dividends, the difference between 10.75% and 35.75% is £9,300. This requires genuine share ownership and should be set up properly — it’s not a loophole, it’s standard tax planning.
4. Retaining profits in the company
If you don’t need the cash now, leaving profits in the company means you only pay Corporation Tax (19-25%) rather than Corporation Tax plus dividend tax. You’ll pay dividend tax eventually when you extract the money, but deferral has value — especially if rates might change again.
Frequently asked questions
How much more dividend tax will I pay in 2026/27?
The increase depends on your total dividends. As a rough guide: for every £10,000 of dividends in the basic rate band, you’ll pay £200 more. For every £10,000 in the higher rate band, you’ll pay £200 more. A typical contractor on £500/day will pay approximately £1,569 more per year.
Did the dividend allowance change in April 2026?
No. The dividend allowance remains at £500 for 2026/27. It hasn’t changed since 2024/25, when it was cut from £1,000 to £500. But at the new 10.75% basic rate, that £500 allowance is only worth £54 in saved tax — barely noticeable.
Should I switch from a limited company to an umbrella?
For most contractors outside IR35, no. Even with the dividend tax increase, a limited company on a £500/day rate takes home roughly £72,765 — significantly more than the approximately £64,200 you’d keep through an umbrella company. The limited company advantage has narrowed, but it’s still substantial at most day rates.
Compare your take-home across all structures →
Are dividend tax rates expected to increase again?
There’s no announced plan for further increases, but the trend over the past decade has been consistently upward. The basic rate has gone from 7.5% (2016/17) to 10.75% (2026/27), and the allowance from £5,000 to £500 over the same period. Pension contributions and company profit retention are worth considering as hedges against future increases.
Does this affect me if I’m inside IR35?
No. Inside IR35, your income is taxed as employment income through PAYE — you don’t receive dividends. The dividend tax increase only affects contractors operating outside IR35 through a limited company who extract profits as dividends.
Want to see exactly how the dividend tax rise affects your specific day rate and salary split? Use our free Dividend vs Salary Calculator — it uses the latest 2026/27 rates and shows you the optimal extraction strategy in seconds.