If you've been operating a PSC for years, dividend tax probably feels like background noise. It's worth paying attention now — the Autumn 2025 Budget pushed both the basic and higher dividend rates up 2 percentage points from April 2026, and that has knock-on effects on the most basic decision a contractor makes: how much to pay yourself as salary versus dividends.
Here's how it all actually works in 2026/27 for a UK contractor running their own Ltd.
The rates and the allowance
UK dividend tax in 2026/27:
| Band | Income range | Rate 2025/26 | Rate 2026/27 |
|---|---|---|---|
| Dividend allowance | First £500 | 0% | 0% |
| Basic rate band | £12,571 - £50,270 | 8.75% | 10.75% |
| Higher rate band | £50,271 - £125,140 | 33.75% | 35.75% |
| Additional rate band | £125,141+ | 39.35% | 39.35% |
The £500 dividend allowance is a tax-free band, but a subtle point catches a lot of people out: that £500 still uses up basic rate band space. So if your other income (salary, rental, interest etc.) already fills the basic rate band, your "tax-free" £500 of dividends actually sits at the higher rate boundary — not effectively saving you the basic rate; it's saving you whatever rate would have applied on the next pound.
Why dividend tax isn't really 10.75%
The headline rates are misleading because dividends are paid out of post-corporation-tax profit. The company has already paid corp tax on the money before it can be distributed.
For a typical small contractor PSC with profits between £50,000 and £250,000, corporation tax sits in a marginal rate band somewhere between 19% and 25% — on most contractor income the effective marginal corp tax rate is around 26.5% due to marginal relief tapering. Above £250,000 of profits it's a flat 25%.
So when you take a basic-rate dividend in 2026/27, the actual end-to-end tax rate on that pound earned by the company is:
- 25% corp tax (call it that for simplicity), leaving 75p
- 10.75% dividend tax on the 75p = 8.06p
- Effective rate: 33.06%
In the higher rate band the same calculation lands at 51.81% effective. In the additional rate band, 54.51%. These compounded rates are what actually matters when you're comparing PSC income to PAYE income — not the headline 10.75% / 35.75% / 39.35%.
The 2pp rise — what it actually costs you
The 2pp rise sounds small in headline terms. Worked through for a typical contractor it costs a measurable amount of take-home.
At £500/day outside IR35, working 220 days, the gross company revenue is £110,000. After corp tax and a director's salary of £12,570, dividends paid land in the higher-rate band for most of the year. A 2pp rise on the higher-rate dividend portion costs roughly £1,481/year in take-home at this level.
The drop is broadly stable across day rates — we modelled it in the "What Changed in 2026/27" guide — because the 2pp applies to the dividend amount, which roughly tracks revenue. So contractors at £400-1,000/day see £1,200-£1,700/year of additional tax.
See your specific 2026/27 take-home
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Open the calculator →Why the £12,570 salary still wins
The classic PSC strategy is to take a director's salary up to the personal allowance (£12,570) and the rest as dividends. The 2pp rise hasn't changed which level is optimal, but it's worth understanding why.
At a £12,570 salary in 2026/27:
- No income tax (fully covered by the personal allowance)
- No employee NI (below the primary threshold)
- Employer NI of £1,135.50 (15% on the £12,570 minus £5,000 secondary threshold)
- The salary is corp-tax deductible, saving £3,142 at 25% corp tax (so the net employer cost is £1,135.50 NI − £3,142 saved = a corp tax saving of around £2,007)
Compared to taking the same money via dividends, the salary route saves around 7p in the £ at typical 2026/27 rates. Below £12,570 you're leaving personal allowance on the table; above it the income tax kicks in and the maths reverses.
Some accountants advise a lower salary (£5,000 — right at the employer NI threshold) to skip the employer NI entirely, especially for sole-director PSCs that don't qualify for the Employment Allowance. That saves the £1,135 but loses some of the corp-tax-deductible benefit. The net difference is usually under £200/year — not nothing, but small enough that simplicity often wins.
How dividend tax interacts with PA taper
If your total income exceeds £100,000 in a tax year, you start losing your personal allowance — £1 lost for every £2 over £100k, fully gone at £125,140. Dividend income counts toward this total.
This creates a brutal effective marginal tax rate. In the £100k-£125k income band, the combination of income tax on the recovered PA at 40% plus the dividend tax on the dividends themselves means contractors in that band pay an effective 60%+ marginal rate on dividends.
The 2pp dividend tax rise compounds this for contractors operating right at the PA taper threshold. If you're consistently in the £600-700/day range, talk to your accountant about pension contributions to keep adjusted income below £100k.
Practical implications for 2026/27
For most PSC contractors, the dividend tax rise doesn't change the fundamental architecture — salary at £12,570, dividends for the rest, pension contributions where they make sense. What it does change:
- The case for pension contributions is stronger. Money sheltered in a pension avoids both corp tax and dividend tax. Every £1 contributed by the company is worth ~£1 in the pension vs £0.66 if taken as a higher-rate dividend. Worth modelling specifically.
- The case for spouse shareholders is unchanged. If your spouse has unused basic-rate band and there's a genuine commercial rationale (gift of shares with full voting rights, no settlement risk), splitting dividends still works the same way — you just get a slightly smaller absolute saving than under 2025/26.
- The case for staying outside IR35 is materially weaker. The gap to inside IR35 has narrowed. We covered the maths in detail in the inside vs outside explainer.
For more detailed planning around Limited Company specifics — director's pay strategies, retained-profit decisions, spouse dividend structures — limitedcompanyhelp.com has comprehensive Ltd-specific guidance worth bookmarking. For the specific salary-vs-dividends trade-off at different income levels, Integro Accounting's comparison guide walks through the maths from the accountant's side and complements the worked example above.
What's coming next
The dividend tax rates are confirmed for 2026/27 but the personal allowance, basic rate threshold, and additional rate threshold are all frozen until April 2031 per HMRC's published rates. That means fiscal drag continues: as your revenue grows with inflation, more of it pushes into higher tax bands, and the relative weight of dividend tax rises year on year even if the headline rates don't move.
Most contractors should plan as if dividends will keep being slightly more taxed each year through to 2031. The structural answers — pension contributions, spouse income splitting where genuinely commercial, retained profit decisions — get more important not less.