Why dividend tax changed from 6 April 2026

Finance Act 2026 (c. 11), which received Royal Assent on 18 March 2026, raised two of the three dividend rates under section 4. The ordinary rate, which applies to dividends within the basic-rate band, rose from 8.75% to 10.75%. The upper rate, which applies to dividends within the higher-rate band, rose from 33.75% to 35.75%. The additional rate stayed at 39.35%. Both increases took effect from 6 April 2026, meaning they apply to dividends paid in 2026/27 and subsequent years until Parliament changes them again.

The statutory hook is the amendment to ITA 2007 s.8 made by Finance Act 2026 s.4. Every dividend paid by a PSC director on or after 6 April 2026 is subject to these new rates, regardless of when the underlying profits were earned.

The rates applicable in 2025/26 and earlier tax years were 8.75% (ordinary) and 33.75% (upper). If any 2025/26 dividends remain unpaid and are declared after 6 April 2026, the 2026/27 rates apply. Year-labelling matters: never apply the old 8.75%/33.75% figures to a 2026/27 tax calculation.

The three dividend tax rates in 2026/27

There are three possible rates, determined by which income band the dividend falls into once all other income has been stacked underneath it.

Rate Band it applies to 2026/27 rate Rate in 2025/26 and earlier
Ordinary rate Dividends within the basic-rate band (total income up to £50,270) 10.75% 8.75%
Upper rate Dividends within the higher-rate band (total income £50,271 to £125,140) 35.75% 33.75%
Additional rate Dividends where total income exceeds £125,140 39.35% 39.35% (unchanged)

The rate on any given slice of dividend income depends entirely on where that slice falls once salary and other income are placed in the bands first. A contractor whose total income sits mostly below £50,270 will pay 10.75% on most of their dividends. One who crosses the higher-rate threshold partway through the year will pay 10.75% on dividends within the basic-rate band and 35.75% on dividends above it.

The £500 dividend allowance

Every individual receives a £500 dividend allowance in 2026/27. Dividends within the allowance are taxed at 0%. This has been the allowance since 2024/25, when it was cut from £1,000 (the £1,000 allowance applied in 2023/24, itself reduced from £2,000).

There are two things to understand about how the allowance works in practice.

First, it is not a pure exemption: the £500 still occupies a slice of your income band. If the £500 allowance sits within the basic-rate band, it uses up £500 of the basic-rate band that would otherwise be available for the next slice of dividends. This matters when calculating how much of your dividend sits at 10.75% versus 35.75%.

Second, the allowance is available at all levels of income. A contractor paying the additional rate on most of their dividends still receives a £500 slice taxed at 0%, but it is a small saving against a large dividend at 39.35%.

Practically, for a PSC director taking a modest dividend of £30,000, the first £500 is taxed at 0% and saves roughly £54 compared to taxing the whole amount at 10.75%. The allowance has reduced in value each time it has been cut; the planning benefit is now relatively small, and the salary and pension levers discussed below matter much more.

How dividends are taxed in order: stacking on top of other income

Understanding the dividend tax bill requires understanding the order in which income is taxed. HMRC stacks income types in a fixed sequence before applying rates:

  1. Non-savings income first (salary, self-employment income, rental income, pension income). This uses up the personal allowance and basic-rate band first.
  2. Savings income second (interest, bond income). The personal savings allowance and the 0% starting rate for savings apply here.
  3. Dividend income last. Dividends fill in whatever band space is left after non-savings and savings income have been allocated.

For a PSC director, the most common position is: salary occupies the first slice of the bands (say, £6,708 or £12,570), the personal allowance shelters salary up to £12,570, and then dividends fill in from there. The effect is that the rate on dividends depends entirely on how much of the £50,270 higher-rate threshold was consumed by salary.

A worked example with 2026/27 figures

Take a contractor with a salary of £12,570 (at the personal allowance) and dividends of £30,000.

  • Salary of £12,570 uses the personal allowance in full. No income tax on the salary itself (employer NIC applies separately).
  • The basic-rate band runs from £12,571 to £50,270, giving £37,700 of band remaining after salary.
  • Dividends of £30,000: the first £500 at 0% (dividend allowance). The remaining £29,500 falls within the basic-rate band and is taxed at 10.75%.
  • Dividend tax = £500 at 0% (£0) plus £29,500 at 10.75% = £3,171.25.
  • Total income = £42,570 (below £50,270, so no higher-rate dividend tax applies).

Now take the same contractor but with dividends of £50,000.

  • Salary £12,570 (uses personal allowance as above).
  • Basic-rate band remaining after salary: £37,700.
  • Dividends: £500 at 0% (allowance). Next £37,200 at 10.75% = £3,999.00. Remaining dividends: £50,000 minus £500 minus £37,200 = £12,300 at 35.75% = £4,397.25.
  • Total dividend tax = £3,999.00 plus £4,397.25 = £8,396.25.
  • Total income = £62,570 (above the £50,270 threshold; the upper rate applies to the top slice).

The shift from 10.75% to 35.75% on that upper slice is a 25-percentage-point jump. Controlling how much dividend falls above £50,270 is therefore one of the most valuable planning levers available.

Fiscal drag: the frozen bands compound the rate rises

The personal allowance has been fixed at £12,570 and the higher-rate threshold at £50,270 since 2021/22. At the November 2025 Budget, the freeze was extended to April 2030/31. In practical terms, the bands will have been frozen for ten consecutive tax years.

What this means for a contractor taking dividends is that year-on-year increases in day rates pull more dividend income across the £50,270 threshold without any change in the headline rate. A contractor whose total income sat at £45,000 in 2021/22 may now be at £55,000 or more, having crossed into the upper band, paying 35.75% on the top slice in 2026/27 where they used to pay 8.75% on all of it. The combination of the rate rise (from 33.75% to 35.75%) and the band freeze means the effective cost of being a higher-rate taxpayer on dividends has risen sharply since 2021.

The fiscal-drag dynamic applies to the personal-allowance taper as well. The taper begins where adjusted net income exceeds £100,000 and reduces the allowance by £1 for every £2 of income above that, running to nil at £125,140. A contractor who was comfortably below £100,000 a few years ago may now be inside the taper zone, creating an effective marginal rate of around 60% on income between £100,000 and £125,140. Dividends are included in adjusted net income for this calculation, so a large dividend in a high-contract year can erode the personal allowance entirely.

The combination of fiscal drag and the FA 2026 rate rise is not a coincidence of timing: both are deliberate policy directions, and there is no political consensus at present around reversing either. Contractors who plan on the assumption that rates or thresholds will improve soon are taking a risk. The sensible approach is to plan for the current 2026/27 regime and use the levers available within it, rather than waiting for a more favourable year.

Planning around the dividend tax bands

There is a clear hierarchy of planning actions available to a PSC director. The detail of how each works and which configuration is right for a particular contractor is covered in the director salary and dividend split guide. The principles, in order of impact, are as follows.

1. Keep total income below the higher-rate threshold where possible

The single most important line is £50,270. Dividends below that threshold are taxed at 10.75%; dividends above are taxed at 35.75%. Where a contractor can genuinely cap total income in the year (salary plus dividends plus other income) at or below that line, every pound of dividend stays in the ordinary band. For many PSC contractors operating at moderate day rates, this remains achievable, though the frozen threshold means the margin shrinks each year.

2. Use employer pension contributions before declaring a large dividend

An employer pension contribution paid by the PSC reduces the company's taxable profit (it is deductible against corporation tax) and does not create income in the director's hands when paid in. It is not salary and it is not a dividend: it enters the pension with no income tax and no NIC charge. The annual allowance is £60,000 in 2026/27, with up to three years of carry-forward available. A contractor who has not maximised contributions in previous years may be able to make a large one-off employer contribution, reducing the company profit that would otherwise need to be extracted as a dividend and taxed at 35.75% or more. The pension route is the subject of the contractor pension employer contributions guide and the pension carry-forward guide.

3. Watch the £100,000 taper zone

Where adjusted net income could breach £100,000, the personal-allowance taper creates a 60% effective marginal rate on income in the £100,000 to £125,140 band. A contractor in this zone loses £1 of personal allowance for every £2 of income above £100,000 and effectively pays income tax on both the income itself and the lost allowance. Employer pension contributions reduce adjusted net income, making them especially powerful in the taper zone. Taking a smaller dividend in a high-profit year and retaining the balance in the company, then drawing it in a later lower-income year, is an alternative where the company's cash position allows it.

4. Consider the timing of dividend declarations

Dividends are taxed in the year they are declared (or the year a right to receive them arises, in the case of a formal board resolution). A contractor near a band boundary in late March could consider whether to defer a dividend to the new tax year, particularly if the new year looks set to have lower income overall. This is straightforward planning, not avoidance, but it requires the dividend to be formally declared after 6 April, not simply recorded as having been paid then. Procedural discipline (board minute, up-to-date management accounts showing sufficient distributable reserves) is essential.

5. Do not neglect the spouse or civil partner position

A PSC with two shareholders can declare dividends on different share classes or in different amounts to the two shareholders, provided the company's articles and any shareholders' agreement permit it and the shares genuinely carry different rights. Where one partner has a lower income, dividends on their shares may attract a lower tax rate, or fall entirely within the basic-rate band at 10.75% rather than the upper rate at 35.75% that applies on the primary contractor's top slice. This area interacts with the settlements legislation (ITTOIA 2005 ss.619 to 648) and share valuation rules; it is not suitable for casual implementation, but it is a real planning option for a contractor whose family circumstances make it relevant and where the shareholding structure reflects a genuine economic arrangement. A contractor accountant can model the position taking into account both shareholders' full income picture, pension contributions and any other sources of income before a dividend is declared.

The FA 2026 rate rise in context: how much more does it cost?

For a contractor taking £30,000 of dividends within the basic-rate band, the rise from 8.75% to 10.75% costs an additional 2% of taxable dividends (after the £500 allowance). On £29,500 of dividends (£30,000 less the allowance) that is an extra £590 per year.

For a contractor taking £20,000 of dividends in the upper band, the rise from 33.75% to 35.75% costs an additional 2% of those dividends: an extra £400.

These are not dramatic individual increases, but they compound over a career and combine with the frozen-band effect. A contractor who was paying 8.75% on all their dividends in 2021/22 and is now paying 35.75% on part of them in 2026/27 has seen a very significant increase in cost, driven almost entirely by the frozen bands rather than the rate changes alone.

Dividends and IR35: when the planning is constrained

The salary and dividend split only works for income that sits outside the IR35 framework. Where an engagement is caught by the off-payroll working rules (Chapter 10 of ITEPA 2003), the fee-payer deducts PAYE and NIC before paying the PSC. That inside-IR35 income has already been taxed, and withdrawing it again as a dividend would risk double taxation. A contractor whose entire income is inside IR35 has no meaningful dividend planning available on that income.

For contractors with a mix of outside and inside engagements, the company will have outside-IR35 profits from which a tax-efficient dividend can legitimately be paid, and inside-IR35 receipts that flow through differently. Keeping the accounting clean so that outside-IR35 and inside-IR35 receipts are correctly identified is an important bookkeeping discipline. The wave-1 guide on PSC limited company contractor tax covers how the company-level position interacts with the individual extraction.

The question of whether to run a PSC at all for a predominantly inside-IR35 contractor is a structural one: an umbrella company may be simpler and sometimes more economic. See the comparison in the limited company vs umbrella contractor guide.

Self Assessment and dividend tax reporting

A PSC director must file a Self Assessment return each year. Dividend income is reported in the return and the tax is calculated as part of it. PSC dividends are paid gross (no tax is withheld at source), so the full liability falls due on 31 January after the end of the tax year: 31 January 2028 for 2026/27 dividends. HMRC charges automatic late-filing and late-payment penalties, with interest accruing on unpaid tax from 1 February.

The payments-on-account system applies where the Self Assessment tax bill exceeds £1,000 and less than 80% was collected through PAYE. Where it applies, HMRC requires two advance payments towards the following year: 50% on 31 January and 50% on 31 July. A contractor who takes a larger dividend in 2026/27 than in 2025/26 will face both the balancing payment for 2026/27 and a first payment on account for 2027/28 on the same 31 January 2028 deadline. That double hit can run to several times the contractor's usual monthly earnings if it has not been planned for. Setting aside estimated dividend tax in a separate account each time a dividend is declared is the simplest safeguard.

Where circumstances change and the 2027/28 income will be materially lower than 2026/27 (for example, if the contractor takes a career break, reduces their dividend or winds up the company), payments on account can be reduced by a claim to HMRC before the relevant deadline. The claim must be made in good faith on a realistic estimate; penalties apply if the reduction claim is excessive and results in underpayment.

The broader contractor compliance picture, including corporation tax filings, accounts and the annual review of extraction strategy, is covered by the Contractor Tax Accountants services page.

What the director salary and dividend split guide covers

This page has focused on what dividend tax costs and how the rates apply. The complementary question is how to structure the salary and dividend split in the first place, taking into account Employment Allowance eligibility, the corporation tax saving on salary, and the trade-off between a larger employer pension contribution and a smaller dividend. That is the subject of the director salary and dividend split guide, which works through the 2026/27 salary options (£5,000 / £6,708 / £12,570) and models the overall tax position at each level.

Planning dividend tax in isolation misses the bigger picture. The optimal answer almost always involves coordinating salary level, pension contributions and dividend timing together.

Summary: what matters for 2026/27

The key facts to take into: the ordinary dividend rate is 10.75% for dividends within the basic-rate band, up from 8.75% before 6 April 2026. The upper rate is 35.75%, up from 33.75%. The additional rate is 39.35% (unchanged). The dividend allowance is £500. The thresholds are frozen: basic-rate band to £50,270 and personal allowance at £12,570, both until April 2031. Dividends stack on top of all other income, so the rate on the top slice of dividends rises sharply once total income crosses £50,270.

For most PSC contractors, the practical focus is on keeping total income within the basic-rate band, using employer pension contributions as a pre-extraction tool, and monitoring the personal-allowance taper if income approaches £100,000.

If you want to review how your current salary and dividend structure holds up against the 2026/27 rates and the frozen thresholds, our contractor accounting services include an annual extraction review as part of the engagement. Speak to the team at Contractor Tax Accountants to see where the numbers sit.