Dividends in 2026/27: an expert’s explainer for contractors

It's no surprise that limited company directors are being urged to review remuneration ahead of 2026/27, as the FT reported yesterday.

There were warnings by accountancy experts to contractors and other ContractorUK readers to run that very same review back at Spring Statement 2026.

Why is reviewing dividends more important in 2026/27?

Those early warnings stem from the fact that for the 2026/27 new tax year (starting April 6th 2026), the rates of dividend tax are changing.

Therefore, reviewing how you pay yourself as a contractor who is also the director of your own limited company is a matter of tax efficiency, not just housekeeping.

Given that our trusted accountancy practice has already demystified what makes a tax-efficient salary in 2026/27, let's now focus on the other key way that directors receive their earnings — dividends, writes Lauren Monks, a director of Dolan Accountancy, a tax and accounting firm with over 25 years' experience in contractor accountancy.

When was dividend tax increased?

To fully grasp next month's changes to dividends, contractors need to go back to November 2025.

That's when chancellor Rachel Reeves used Autumn Budget 2025 to set out tax-raising measures worth up to £26billion.

And one of those measures was to increase dividend taxation.

What has the chancellor said about dividends?

Reeves said on November 26th 2025: "Currently, a landlord with an income of £25,000 will pay nearly £1,200 less in tax than their tenant with the same salary because no National Insurance is charged on property, dividend or savings income.

"It's not fair that the tax system treats different types of income so differently, and so I will increase the basic and higher rate of tax on property, savings and dividend income by 2 percentage points."

Dividend allowance in 2026-27: What is it?

The first £500 of dividends is chargeable to tax at 0%. But after this £500 amount, known as the "dividend allowance," a dividend tax rate is applied.

So once £500 is exceeded, dividend tax kicks in.

This dividend allowance of £500 is remaining in place for 2026/27.

What is the dividend tax increase in 2026?

Under the chancellor's budget announcement, there will be a 2% increase in the ordinary ("basic") and upper ("higher") rates of income tax applicable to dividends.

These additional 2% increases on dividends apply from April 6th 2026.

But for 2026/27, the "additional" rate remains unchanged at 39.35%.

What are UK dividend tax rates for 2026-27?

In summary, dividends received above the dividend allowance will be taxed at the following rates:

These two small but significant increases will, of course, affect the amount you take home if a percentage of your earnings is taken from dividends.

How are dividends paid in a limited company?

It's very common for a limited company director to pay themselves a smaller figure in salary, and then 'top up' their income with dividends from the company.

Dividends do not attract National Insurance (NI), which is why a salary-dividend combination is the most tax-efficient way to pay yourself as a director.

But there's more to consider.

Why does the income tax personal allowance matter to directors?

The tax-free Personal Allowance is fixed at the current level of £12,570, and, currently, the government says it will remain frozen until April 2031.

Most directors will set their salary figure for 2026/27 up to the NI thresholds of £12,570 to take home more of their pay, and above the lower earnings limit, so their earnings still count as a qualifying year toward the State Pension.

What is the most tax-efficient way to pay yourself in '26/27?

To be as tax-efficient as possible, i.e. taking the maximum take-home pay with the minimum tax, we suggest the following payment structure for 2026/27:

Assuming you are receiving your full tax-free personal allowances and have no other income, this pay structure will keep you within the basic band rate, making full use of your personal and dividend allowance.

What's an example of higher dividends that's still tax-efficient in 2026/27?

If company profits allow, you may wish to increase your take-home pay. To do this, the payment structure would alter and look something like this:

By keeping your income below £100,000, you wouldn't lose your personal allowance, and you'd still be entitled to childcare benefits and tax-free childcare if you have a young family.

What if you and your spouse are both company shareholders?

Dividends are paid in accordance with the shareholding, so if you and your spouse are 50/50 shareholders of the company, dividends will be paid equally between you.

To make use of both allowances, the payment structure would be as follows:

Spouse A:

Spouse B:

This puts your total household income at £92,542 — paying just £7,998 in tax to HMRC.

How else can contractors boost income, as the 2p dividend hike looms?

Claiming back expenses incurred in the running of your contractor business is a way in which you can 'boost your income.'

By claiming allowable expenses on your self-assessment tax return, you reduce both your income tax and NI liabilities, lowering your tax bill at the end of each year.

As well as typically allowable expenses you can consider claiming, ranging from office costs to business insurance, there are also specific expenses to explore if you work remotely or work from home as a contractor.

Tax-efficient profit extraction: Final Takeaways as '26/27 dawns

Company pension contributions also remain one of the most tax-efficient ways in which to extract profit, as they are a deductible business expense, and don't trigger personal income.

Another one of the big ways? It's definitely dividends. But don't wade into drawing dividends, or "distributions," unadvised.

Indeed, tax planning is crucial to ensure you're being both compliant and tax-efficient, and with the 2% points increase now looming large, speaking with a trusted accountant to get the most out of your earnings is shrewd.