One of the most common questions we hear from owner-managed business clients is:
“What’s the most tax-efficient way to extract funds from my company?”
Traditionally, the answer has been simple: pay yourself a salary up to your personal allowance, then top it up with dividends. But with changes announced in the Autumn Budget 2025, that model is becoming more expensive – especially for basic rate taxpayers.
What’s changing?
From 6 April 2026, the basic rate of dividend tax increases from 8.75% to 10.75%, while the higher rate increases from 33.75% to 35.75%. The £500 dividend allowance remains frozen.
If you’re a company director or shareholder, this means extracting dividends will cost more in personal tax. The overall impact depends on how much profit your company makes and how much you choose to extract.
A worked example
Let’s say you take a salary of £12,570 and draw £40,000 in dividends.
| Pre-Budget (2025) | Post-Budget (2026) | |
| Dividend Tax | £3,456 | £4,246 |
| Take-home Pay | £49,114 | £48,324 |
(Assumes basic rate taxpayer, with no other income.)
The example shows an additional £790 in tax just for taking the same dividend in 2026.
If you then extend this up to £100,000, with the salary of £12,570 and remaining £87,430 as dividend:
| Pre-Budget (2025) | Post-Budget (2026) | |
| Dividend Tax | £19,464 | £21,202 |
| Take-home Pay | £80,536 | £78,798 |
The example shows an additional £1,738 in tax just for taking the same dividend in 2026.
So, what’s more tax efficient in 2026?
There is still no black and white answer, as there are a number of factors to consider. For example:
The benefits of salary include:
- Reduces your company’s Corporation Tax bill
- Helps with mortgage applications
- Boosts state pension entitlement and benefits
The benefits of dividends:
- Not subject to National Insurance Contributions (NICs)
- Still lower overall tax than salary at higher levels
- Can be declared only when profits permit, making them more flexible
The difference now is that the gap is narrowing – especially for basic-rate taxpayers. As always, the right approach depends on your personal circumstances, income mix, and business profit level.
How can we help?
These changes serve as a reminder that tax efficiency isn’t a set-and-forget exercise. If you haven’t reviewed your remuneration strategy recently, now is the time – especially with the 2026 changes on the horizon.
If you are looking to explore the best mix of salary and dividends for your situation, we are here to help.
Get in touch with your usual Harold Sharp contact, or email tax@haroldsharp.co.uk, or call 0161 905 1616 to arrange a review.