A dividend is a distribution of a company's post-corporation-tax profit to its shareholders. For a contractor running a PSC, dividends are the main way profit is extracted alongside a modest salary, because they carry no National Insurance and are taxed at lower rates than salary.
For 2026/27 the dividend tax rates are 10.75% (ordinary), 35.75% (upper) and 39.35% (additional). The ordinary and upper rates rose on 6 April 2026 (from 8.75% and 33.75%) under Finance Act 2026 s.4; the additional rate is unchanged. The first £500 of dividends each year is covered by the dividend allowance and taxed at 0%. Dividends sit on top of other income and are taxed in their own bands after non-savings and savings income.
Dividends can only be paid from genuine distributable profits, and the company should document each one with a board minute and a dividend voucher. Drawings taken ahead of declared profit create an overdrawn director's loan account, which can trigger a s.455 charge. The dividend-rate rise on 6 April 2026 narrowed the incorporation advantage somewhat, so the optimal salary and dividend split should be modelled rather than assumed. See corporation tax for the company-side charge that comes first.