Dividend Tax for Contractors 2026/27
Most limited company contractors take a small salary and draw the rest of their income as dividends. It's the standard set-up, and for good reason — but the tax only makes sense once you see how salary, the £500 dividend allowance and the rate bands stack up. Here's how it works for 2026/27, with a full worked example.
- Dividends carry no National Insurance, which is the whole reason the low-salary-plus-dividends split beats a large salary.
- The first £500 of dividends is tax-free1 — but it uses up part of your basic-rate band, it doesn't sit outside it.
- 2026/27 dividend rates are 10.75% basic, 35.75% higher and 39.35% additional1 once dividends clear the allowance.
- Corporation tax (19% or 25%) is paid on company profit first4, so compare take-home on post-corporation-tax figures, not headline rates.
- As a director drawing dividends you'll almost always need to file a Self Assessment return5.
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 | 10.75% |
| Higher rate | £50,271 – £125,140 | 35.75% |
| Additional rate | Above £125,140 | 39.35% |
The first £500 of dividend income each year is covered by the dividend allowance1 and is taxed at 0% — though it still uses up part of whichever band it falls in.
Worked example
Say you take a salary of £12,570 (using your full Personal Allowance) and £45,000 in dividends in 2026/27. The salary uses the Personal Allowance, so all £45,000 of dividends is on top. Here's how the tax falls out — watch how the £500 allowance eats into the basic-rate band rather than sitting outside it.
| Salary (covered by Personal Allowance) | £12,570 |
| Dividends drawn | £45,000 |
| Dividend allowance (0%, but uses £500 of the basic band) | £500 |
| Basic-rate band left for dividends (£37,700 − £500) | £37,200 |
| £37,200 taxed at 10.75% | £3,999.00 |
| Remaining £7,300 taxed at 35.75% (higher rate) | £2,609.75 |
| Total dividend tax | £6,608.75 |
Personal dividend tax only. Corporation tax on company profits4 is separate and paid before any dividend is drawn. The £500 allowance is taxed at 0% but still counts towards your basic-rate band — that's why only £37,200, not £37,700, is taxed at 10.75%.
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.