Why Taking Dividends Isn't Always the Best Tax Strategy After the 2025 Autumn Budget
- kimberleylock
- Nov 27, 2025
- 5 min read
Yesterday's Autumn Budget delivered by Chancellor Rachel Reeves included a change that will impact thousands of small business owners across the UK: dividend tax rates are increasing by 2 percentage points from April 2026. If you're running a limited company and taking dividends as your main source of income, this change might have you reconsidering your strategy.
But here's something that might surprise you: even before this tax increase, taking dividends wasn't always the most tax-efficient way to extract money from your business. Especially if your company sits right on that crucial £50,000 taxable profit threshold where corporation tax jumps from 19% to 25%.
Let me explain why, and show you exactly what this could mean for your take-home pay.
The New Dividend Tax Rates
From April 2026, here's what dividend tax will look like:
The basic rate increases to 10.75% from the current 8.75%, and the higher rate rises to 35.75% from 33.75%.
The additional rate stays at 39.35%.
You'll still get a £500 dividend allowance before any tax applies.
So why does this matter? Because dividends are taxed after your company has already paid corporation tax on its profits. This is sometimes called "double taxation," though that's a bit of a misnomer since dividends are taxed at lower rates to account for the corporation tax already paid.
The Problem with the Traditional Approach
Most accountants will tell their small business clients to take a salary up to the personal allowance (£12,570 for 2025/26) and then take the rest as dividends. This has been the standard advice for years, and for many businesses, it still makes sense.
But what happens when your business profits hover around £50,000 to £70,000? This is where things get interesting – and where that traditional approach might actually cost you money.
Let's Look at Two Real Scenarios
I've crunched the numbers for a company with £70,000 in taxable profits. Let's call the director Sarah, and we'll compare two different ways she could extract this money.
Scenario A: The Traditional Approach (Small Salary + Dividends)
This is what most small business owners do:
Item | Amount |
Company Profits | |
Company profits before salary | £70,000.00 |
Director's salary | £12,570.00 |
Profit after salary | £57,430.00 |
Corporation Tax | |
Margin Relief | £0.015 |
Proposed net profits | £57,430.00 |
Amount over £50,000 | £7,430.00 |
Margin relief | £2,888.55 |
Estimated Corporation tax payable | £11,468.95 |
Personal Tax on Dividends | |
Dividend paid | £37,700.00 |
Dividend allowance | £500.00 |
Taxable dividend | £37,200.00 |
Dividend Tax at 10.75% | £3,999.00 |
Total Tax Paid | £15,467.95 |
Net income for director | £46,271.00 |
Scenario B: Higher Salary Strategy
Now let's see what happens if Sarah takes a larger salary:
Item | Amount |
Company Profits | |
Company profits before salary | £70,000.00 |
Directors Salary | £30,000.00 |
Profit after salary | £40,000.00 |
Corporation Tax | |
Proposed net profits | £40,000.00 |
Estimated Corporation tax payable | £7,600.00 |
Personal Tax | |
Salary Tax (PAYE) | |
Salary | £30,000.00 |
Personal Allowance | (£12,570.00) |
Taxable Salary | £17,430.00 |
Tax at 20% | £3,486.00 |
Dividend Tax | |
Dividend paid | £30,000.00 |
Personal Allowance remaining | 0 |
Dividend Allowance | £500.00 |
Basic rate band remaining | £20,270.00 |
Dividend in basic rate band | £20,270.00 |
Tax at 10.75% | £2,179.03 |
Dividend in higher rate band | £9,230.00 |
Tax at 35.75% | £3,424.73 |
Total Personal Tax | £9,089.75 |
Total Tax Paid | £16,689.75 |
Net Income for director | £50,910.25 |
The Surprising Result
Look at those final numbers again:
Scenario A (Traditional): £46,271 take-home
Scenario B (Higher Salary): £50,910 take-home
That's a difference of £4,639.25 – nearly £5,000 more in Sarah's pocket by taking a higher salary, despite paying more personal tax!
Why Does This Happen?
The magic is in how corporation tax works. When your profits go over £50,000, you enter what's called the "marginal relief band." Your effective corporation tax rate increases as you approach £250,000 in profits.
In Scenario A, Sarah's company pays £11,468.95 in corporation tax. In Scenario B, by taking more as salary (which reduces the company's taxable profit), she only pays £7,600 in corporation tax – a saving of £3,868.95 at the company level.
Yes, she pays more in personal tax (£9,089.75 vs £3,999.00), but the corporation tax saving more than makes up for it.
This Isn't One-Size-Fits-All
Before you rush to change your salary, here are some important things to consider:
National Insurance: Higher salaries mean both you and your company pay National Insurance contributions. In these calculations, I've assumed the company is using the Employment Allowance, which covers up to £5,000 of employer's NI per year and would wipe out the employer's NI liability in both scenarios. However, not all employers can claim this allowance – for example, if you're a sole director with no other employees, or if you're employing someone for personal, household, or domestic work, you won't be eligible. If you can't use the Employment Allowance, you'd need to factor in employer's NI at 13.8% on earnings above £9,100, which would reduce the benefit of Scenario B.
Your Tax Band: This strategy works best for businesses in that £50,000-£250,000 profit range. If you're well below or well above these thresholds, the traditional dividend approach might still be better.
Pension Contributions: A higher salary opens up opportunities for tax-efficient pension contributions, which could save you even more.
Personal Circumstances: Everyone's situation is different. You might have other income, investments, or tax considerations that affect which strategy works best for you.
What Should You Do?
The key takeaway is this: there's no "standard" approach that works for everyone. The right strategy depends on:
Your company's profit level
Your personal tax circumstances
Your other income sources
Your long-term financial goals
Whether you're claiming any tax credits or benefits that could be affected by higher income
This is exactly why scenario analysis is so important. You need to model different options before deciding how to structure your income.
The April 2026 Changes Make This Even More Critical
With dividend tax rates rising by 2 percentage points next April, the gap between these two strategies will likely widen for many business owners. Taking dividends will become slightly less attractive, making salary extraction potentially even more beneficial for companies in that marginal relief band.
Don't Go It Alone
I get it – tax planning can feel overwhelming, especially when you're trying to run a business at the same time. But getting this wrong could cost you thousands of pounds every year.
The scenarios I've shown you here are based on specific circumstances. Your business is unique, and you deserve a strategy that's tailored to your situation.
Ready to Find Your Best Strategy?
At Lock & Ledger Ltd, we specialise in helping small business owners and solopreneurs navigate exactly these kinds of decisions. We'll run a complete scenario analysis for your business, showing you exactly how much you could save by optimising your salary and dividend mix.
Get in touch with Lock & Ledger Ltd today to book a free consultation. Let's make sure you're set up for success before those April 2026 changes kick in.
The calculations in this article are based on tax rates for the 2026/27 tax year and assume no other income or personal circumstances that might affect your tax position. Always seek personalised advice for your specific situation.
Sources and Further Reading
For more information about the dividend tax changes and how they might affect you:
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