In this article we look to answer questions we have frequently been asked in the recent weeks.

What is a dividend?

If you are reading this article, you most likely know what a dividend is, but it never hurts to go back to basics.

A dividend is a payment that a company makes to its shareholders out of its profits. This can be profits made in the current financial year, or accumulated profits which are also known as reserves.

What is the difference between a dividend and salary?

A salary is a regular payment to an employee of a company for their work or contribution to the business. The payment is subject to: 

• Income tax  
• Employee National Insurance 
• Employer National Insurance

Income tax and Employee National Insurance are payable by the individual but are taxed at source through PAYE i.e. the relevant amount is held back by the company and paid across to HMRC, along with the Employers National Insurance. The monies received by the employee are therefore the net amount with no further tax to pay. The company also receives Corporation Tax relief on the full cost of the salary.

A dividend is seen as a return on investment for owning shares. It is paid from a company’s profits after tax (being Corporation Tax) and can only be paid if there are sufficient distributable reserves (i.e. if the company has enough profits). Dividends are not linked to hours worked or contribution to a company and can only be paid to shareholders of a company.

Dividends are paid to shareholders gross i.e. no tax is held back by the company. The recipient is therefore required to report any dividends received over £500 (the current tax-free dividend allowance) on their tax return where they are subject to income tax. National Insurance is NOT payable on dividend income. As companies pay dividends out of their distributable profits, they are not a tax-deductible expense and the company therefore does not receive any tax relief on the payment of dividends.

What are the income tax rates for dividends and salary for the 25/26 tax year?

Employment income is subject to the following rates:

• 20% (up to £50,270)
  
• 40% (between £50,271 and £125,140)
• 45% (above £125,140)

Salary is also subject to Employees National Insurance at 8% for earnings between £12,571 - £50,270 and 2% for anything above this.

Furthermore, companies pay Employers National Insurance at 15% for any amounts above £5,000.

Dividend income is subject to the following tax rates:

• 8.75% (up to £50,270)
  
• 33.75% (between £50,271 and £125,140) 
  
• 39.35% (above £125,140)

The first £500 of dividend income is also tax free.

What are the changes to dividend rates following the Autumn Budget?

It was announced that the basic and higher rates will increase by 2% meaning dividends will now be subject to the following rates:

• 10.75% (up to £50,270) 
  
• 35.75% (between £50,271 and £125,140) 
  
• 39.35% (above £125,140)

The additional rate band will remain at the current level, as will the £500 dividend free allowance.

When do the new rates take effect?

The increase to UK dividend tax rates will apply from 6 April 2026.

What impact will this have on how much tax I pay?

Most people who draw dividends as part of their regular remuneration, are likely to be using the ‘combined approach’ whereby a small basic salary is taken through PAYE, with the remainder of income topped up via dividends. So based on this approach and if we assume a shareholder has a total remuneration package of £100,000, the difference in their take home pay will be as follows:

So, an individual with these earnings will be £1,738 worse off following the increase in tax rates announced in the Budget.

For any dividends over this level, there will be no difference in tax as a result of the Budget as the additional rate band will remain at the same level.

So, are dividends still beneficial?

The short answer is yes. Even with the planned dividend tax increases from April 2026, taking dividends from a UK company alongside a basic salary generally remains more tax-efficient than taking just a salary, it’s just slightly less beneficial than previously. The main advantage is that you do not pay National Insurance on dividends.

Using a remuneration figure of £100,000 again, here is an example of an individual’s position if we look at all income being paid via PAYE vs dividends using the new rates coming into effect in April 2026:

So, even after the increase in dividend rates, an individual in this scenario will still see a £9,612 tax saving with dividends in comparison to a salary.

What about from the company’s perspective?

It should be noted that dividends are less favourable from a company’s perspective. Although a company pays Employers National Insurance on salaries, this, along with the gross salary, is fully deductible for Corporation Tax meaning they get a 25% tax reduction. Dividends however are not tax deductible and so as dividend draw increases, the tax saving on the individual is largely outweighed by the additional ‘cost’ to the company by not receiving any tax relief on the payment.

What if I need any further information?

This article is a brief overview of the topic and the best approach to remuneration will vary between individuals depending on their personal circumstances. If you are looking for more personalised advice on your company and remuneration planning, then please contact us.