Do You Pay Corporation Tax on Dividends?

No. And that is exactly the problem.

A dividend is not a business expense. It is a distribution of profit that has already been taxed. So paying a dividend does not reduce your company’s corporation tax bill by a single penny — and the tax you then pay personally on that dividend sits on top of the corporation tax the company already paid.

The question directors should be asking is not “do dividends attract corporation tax”. It is “what does it actually cost me, end to end, to get money out of my company”. Dividend tax rates rose on 6 April 2026, which makes that number worth recalculating.

Why dividends are not deductible

Corporation tax is charged on taxable total profits. Only costs incurred wholly and exclusively for the purposes of the trade reduce that figure — and a dividend is not a cost of trading. It is what the company does with the profit after tax has been calculated on it.

The order of operations matters:

1. The company calculates its taxable profit
2. Corporation tax is charged at 19%, 25%, or 25% less Marginal Relief
3. What remains is post-tax profit
4. Dividends are paid out of that

Salary is different. Salary and the employer National Insurance on it are trading costs and are deductible. That is the whole reason the salary-versus-dividend question exists.

What about dividends the company receives?

Different question, different answer. Dividends a UK company receives from other companies are generally not charged to corporation tax under the distribution exemption.

There is a sting for companies in the marginal band. Distributions received from unrelated, unassociated companies are added to your taxable total profits to give augmented profits, and it is augmented profits that are tested against the £50,000 and £250,000 Marginal Relief limits. A company with £240,000 of trading profit and £20,000 of dividend income from an unconnected company has augmented profits of £260,000 — over the upper limit, no Marginal Relief, 25% on the lot.

Dividend tax rates changed on 6 April 2026

The basic and higher rates each rose by two percentage points. The additional rate is unchanged. The dividend allowance remains £500 — the amount of dividend income you can receive each year without paying tax on it, on top of any unused Personal Allowance.

For 2026/27 the Personal Allowance is £12,570, the basic rate band covers the next £37,700 of taxable income, the higher rate applies from £50,271 to £125,140, and the additional rate above that. Dividends are treated as the top slice of your income, so they are taxed at whichever band the rest of your income has already taken you into.

The number that actually matters: total tax on extraction

Combine the corporation tax the company pays with the dividend tax you pay, and this is what £100 of company profit costs to get into your pocket as a dividend in 2026/27.

Two things stand out.

The middle row is the worst. A company inside the £50,000–£250,000 marginal band pays an effective 26.5% on each extra pound of profit — higher than the 25% main rate. Combined with higher rate dividend tax, that is 52.78% of company profit gone in tax. A larger, more profitable company pays less on the same slice.

The increase is real but not dramatic. At 19% corporation tax and basic rate dividend tax, the combined cost rose from 26.09% in 2025/26 to 27.71% in 2026/27 — about 1.6 percentage points.

Worked example

A director takes a £12,570 salary and £37,700 in dividends in 2026/27.

The salary uses the Personal Allowance exactly, so there is no income tax and no employee National Insurance on it. The company pays employer National Insurance at 15% on earnings above the £5,000 secondary threshold — £1,135.50 — which is itself deductible for corporation tax.

On the dividends:

• Dividend allowance covers the first £500 at 0%
• The remaining £37,200 falls in the basic rate band and is taxed at 10.75% = £3,999
• The same dividend in 2025/26 would have cost £3,255 — so the rate change costs this director £744

Now the company side. To hand over £37,700 of dividend, the company must first have £37,700 of post-tax profit. At 19% corporation tax that means earning £46,543 and paying £8,843 in corporation tax.

Total tax on that slice of profit: £8,843 + £3,999 = £12,842 on £46,543, or 27.59%. Marginally below the 27.71% headline rate, because the £500 dividend allowance takes a small bite out of it.

The rules you have to follow to pay one at all

A dividend is a legal act, not a bank transfer. Get this wrong and it is not a dividend.

• You need distributable reserves. Dividends can only be paid out of accumulated realised profits. Not turnover, not cash in the bank — accumulated post-tax profit, less dividends already paid.
• The directors must declare it. Interim dividends are declared by the board; final dividends are recommended by the board and approved by shareholders.
• Keep a board minute and issue a dividend voucher showing the company name, date, shareholder, and amount.
• Pay it in proportion to shareholdings, unless you have a share structure that says otherwise.

If there are no distributable reserves, it is not a dividend — it is a loan. An overdrawn director’s loan account that is not repaid within nine months and one day of the accounting period end triggers a section 455 charge on the company. That charge is the dividend upper rate for the year the loan was made, which for loans made on or after 6 April 2026 is 35.75% — up from 33.75%. The company gets the money back when the loan is repaid, but it is an expensive interest-free deposit with HMRC in the meantime.

Frequently asked questions

Does paying a dividend reduce my company’s corporation tax bill?
No. Dividends are paid out of profit that has already been taxed and are not a deductible expense. Only costs incurred wholly and exclusively for the purposes of the trade reduce taxable profit. Salary and the employer National Insurance on it are deductible; dividends are not.

What are the dividend tax rates for 2026/27?
10.75% for basic rate taxpayers, 35.75% for higher rate and 39.35% for additional rate. The basic and higher rates each rose by two percentage points on 6 April 2026. The dividend allowance remains £500.

Does my company pay corporation tax on dividends it receives from other companies?
Generally no — dividends received by a UK company are usually not charged to corporation tax under the distribution exemption. But distributions from unrelated, unassociated companies are added to taxable total profits to give augmented profits, and it is augmented profits that are tested against the £50,000 and £250,000 Marginal Relief limits.

What is the total tax cost of taking profit as a dividend?
Combining corporation tax and dividend tax, £100 of company profit extracted as a dividend costs 27.71% in total for a basic rate shareholder where the company pays 19% corporation tax, rising to 52.78% for a higher rate shareholder where the company is in the 26.5% marginal band.

What happens if I take a dividend with no distributable reserves?
It is not a valid dividend. It is treated as a loan to the director. If the loan is not repaid within nine months and one day of the accounting period end, the company pays a section 455 charge at the dividend upper rate for the year the loan was made — 35.75% for loans made on or after 6 April 2026 — recoverable only when the loan is repaid.

Getting the extraction decision right

There is no universal answer to salary versus dividend. It depends on the company’s profit level, your other income, whether Employment Allowance is available, and how much you want to put into a pension. What is universal is that the decision should be made before the year end, not after it.

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