Dividend Tax for Contractors 2026/27
Limited company contractors typically take a low salary and top up with dividends from company profits. This guide explains how UK dividend tax applies to that structure, with 2026/27 rates and a worked example.
Published by the UK Money Calculators editorial team. Last updated for the 2026/27 tax year.
How the salary-plus-dividends structure works
Your limited company pays corporation tax on its profits. What remains can be kept in the company or paid out as dividends. As a contractor-director you typically set your salary at or near £12,570 and take the rest as dividends.
Dividends attract no NIC — not from the employee side or the employer side. That is the main advantage over a high salary. But corporation tax (19% or 25% depending on profit levels) comes before any dividend is paid, so the efficiency calculation isn't as simple as just comparing rates.
2026/27 dividend tax rates
Once dividends land in your hands, personal dividend tax applies. Your salary fills the Personal Allowance and rate bands first. Dividends sit on top.
| Band | Income range | Dividend rate |
|---|---|---|
| Basic rate | Up to £50,270 | 8.75% |
| Higher rate | £50,271 – £125,140 | 33.75% |
| Additional rate | Above £125,140 | 39.35% |
The first £500 of dividend income each year is covered by the dividend allowance and is not taxed.
Worked example
Scenario: A contractor takes a salary of £12,570 and dividends of £45,000 in 2026/27.
- Salary of £12,570 uses the full Personal Allowance — no income tax on salary.
- Dividends of £45,000 sit on top. No Personal Allowance remains.
- First £500 of dividends: covered by the dividend allowance — £0 tax.
- Basic-rate band available for dividends: £50,270 − £12,570 = £37,700. After using £500 allowance, £37,200 remains in the basic band.
- Next £37,200 at 8.75% = £3,999.
- Remaining £7,300 (£45,000 − £500 − £37,200) falls in the higher-rate band: £7,300 × 33.75% = £2,610.
- Total dividend tax: approximately £6,609.
This is personal dividend tax only. Corporation tax on company profits is separate and paid before dividends are drawn.
Common mistakes
- Forgetting corporation tax comes first. The tax-efficiency comparison should be made on post-corporation-tax profits, not gross revenue.
- Using the wrong dividend allowance figure. The allowance is £500 for 2026/27. It was reduced from £1,000 in April 2024 and from £2,000 in April 2023. Using £1,000 or £2,000 will underestimate your tax bill.
- Ignoring how salary affects the bands. Your salary determines how much basic-rate band is left for dividends. A higher salary leaves less room in the basic-rate band and pushes more dividends into the higher-rate band.
- Not registering for Self Assessment. As a director receiving dividends, you must complete a Self Assessment return annually. HMRC cannot collect dividend tax through PAYE.