This year, there’s been a quiet but noticeable change in tax rules. It’s easy to miss, but it could mean you’ll be paying more tax than you need to. From 6 April 2026, dividend tax rates have increased – a change that follows last year’s rise in employer National Insurance in reducing the tax advantages enjoyed by many limited companies.

This doesn’t mean you should panic – but it does mean you should check your numbers. If an older approach is no longer tax efficient, there are things we can do to help.

How dividend rates have changed

Historically, owner-directors have been able to draw a lower and more tax-efficient salary, with the remainder of their money taken as dividends.

From April this year, the ordinary dividend rate has risen from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75% (although the additional rate is unchanged at 39.35%). This tax is payable on all dividends above the £500 tax-free allowance (and your standard personal allowance). The result of this 2% rise is that dividends are now more heavily taxed, making them less tax-efficient than they once were. Effectively, the gap between a salary and dividends has been narrowed.

This is particularly problematic because income tax and National Insurance thresholds have been frozen until April 2031. In cash terms, the personal allowance, basic rate band and higher rate threshold are unchanged – however, as the cost of living rises, so does the requirement for higher dividends. Each year, a growing share of your income is likely to drift into higher-rate tax.

Business owners have also been affected by a change to National Insurance. From April 2025, the rate of employer National Insurance Contributions (NICs) has risen from 13.8% to 15%. The secondary threshold at which you, as an employer, begin paying NICs has been almost halved, and now sits at £5,000. Fundamentally, employing staff has become more expensive – adding an extra financial pressure.

So, if owners choose to pay themselves a higher salary, in lieu of dividends, it’ll potentially cost the company more money. The Employment Allowance, of up to £10,500, also can’t be claimed by most sole director companies with no other staff on the payroll – a common structure for associates.

How this could play out (an example)

The effect of these changes is small, but with many practices facing a tougher financial climate, it’s money nobody can afford to fritter away.

Let’s say you’re a limited company director drawing a small salary of £12,570. You’re using the full personal allowance, so no tax is due on your salary. You’re also taking £60,000 in dividends.

Of this £60,000, £500 will be covered by the dividend allowance at 0%. After this, £37,200 falls within the basic rate band and is taxed at the ordinary dividend rate. A further £22,300 falls above the higher rate threshold and is taxed at the higher dividend rate. The dividends aren’t entirely in one band – they span both.

At the 2025/26 tax rates, you’d pay £10,781.25 in tax. At 2026/27 rates, this rises to £11,971.25. That’s £1,190 a year in extra tax.

What you can do

None of this means that you should step away from operating as a limited company. The company wrapper hasn’t stopped working, but it is working less hard than it did two years ago. All that’s needed is some fine-tuning, to make your directors’ income as tax-efficient as possible.

For example, employer pension contributions remain deductible for Corporation Tax purposes, and aren’t subject to dividend tax. This makes them a viable option if you’ve got retained profit and breathing room within your annual allowance. And, if you’re running more than one business, it’s worth remembering that marginal relief thresholds are divided between your associated companies.

If your salary and dividend splits were set up before April 2026, they’re worth revisiting now. Even if nothing has changed for you, the numbers behind them have. With tax rules continuing to evolve (and as-yet-unknown changes still to come in a new Budget), a moment’s pause makes great financial sense. We can help reassess your situation and make subtle shifts to get you back on track.