How dividends trigger the 60% trap for directors

Short answer: for a director on a small salary plus dividends, the next pound of dividend inside the £100,000 to £125,140 band is taxed at 58.25%. On a salary at the National Insurance upper earnings limit it is 55.75%. Neither figure is published anywhere, so the working is shown below and you are welcome to check it.

Every article about the 60% tax trap is written for employees. Not one of the pages currently ranking for it explains what happens when the income arriving is dividend income, which is how most company directors are paid. The arithmetic is different, and it got worse this April.

Why dividends behave differently

Two things happen at once when a director takes an extra pound of dividend inside the taper band.

• The dividend itself is taxed at the upper dividend rate of 35.75%, which rose from 33.75% on 6 April 2026 (gov.uk).
• That pound also removes 50p of personal allowance, which was sheltering other income from tax (gov.uk).

For an employee the second effect is simple, because the sheltered income is salary taxed at 40%, giving the familiar 60%. For a director it depends on what the lost allowance was sheltering and what it displaces further up the stack, which is why the answer is not a round number.

The rates, worked out

Personal allowance is set against non-dividend income first, and dividends sit at the top of the stack. So the answer depends on your salary.

Where 58.25% comes from

Take a director on a £12,570 salary with total income of £110,000. The personal allowance has tapered to £7,570, so £5,000 of salary is taxable at 20% and the rest of the basic rate band is filled with dividends at 10.75%. One more pound of dividend does three things:

• The pound itself is taxed at 35.75%, which is 35.75p.
• The allowance falls by 50p, so 50p more salary becomes taxable at 20%, which is 10p.
• That 50p of salary also eats 50p of basic rate band, pushing 50p of dividend from 10.75% up to 35.75%, which is 12.5p.

Add them: 35.75 + 10 + 12.5 = 58.25p in the pound. Over a full £10,000 of dividend taken inside the band, the tax goes from £21,777 to £27,602, a difference of £5,825, which is 58.25% to the penny.

Why a bigger salary gives a lower rate

On a £50,270 salary the basic rate band is already full of salary, so there is no dividend to push up a band. The lost allowance simply exposes 50p of salary at 40%, which is 20p, plus the 35.75p on the dividend: 55.75%. Counterintuitive, and a genuine argument for reviewing the salary and dividend split rather than leaving it where your accountant set it three years ago.

Remember the corporation tax underneath

Those rates are on the dividend in your hands. The company has already paid corporation tax on the profit before it could be distributed: 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between (gov.uk).

So £10,000 of company profit taxed at 25% leaves £7,500 to distribute, and a director in the taper band keeps £3,131 of it. That is the number to hold in your head when someone tells you dividends are tax efficient.

What to actually do about it

• Watch the line, not the salary. Dividends count towards adjusted net income. If you are declaring dividends near the end of the year, you are in control of exactly where you land, which employees are not.
• Consider an employer pension contribution instead. It is deductible against corporation tax, carries no National Insurance, and skips the dividend rate entirely. I have put the comparison in its own piece: employer pension contribution or dividend?
• Revisit the salary and dividend split. As the table above shows, the salary level changes your marginal rate on dividends. That is not something most default set-ups account for.
• Mind the childcare cliff. If you have young children, the £100,000 line costs a great deal more than the tax alone: the £100,000 childcare cliff edge

My honest take

Directors have more control over their own marginal rate than almost anybody else, and most use almost none of it. The pay structure gets set once, usually at incorporation, and then nobody looks at it again while the rules change underneath.

The dividend rate rose two percentage points this April. If your extraction plan was designed before that, it was designed for a different tax system.

Worth saying plainly: this is financial education, not regulated advice or a personal recommendation. Figures are 2026/27 for England, Wales and Northern Ireland, and assume salary plus dividends with no other income, no student loan and no Scottish rates. The marginal rates above are calculated from the published allowances and rates rather than quoted from a published table, so check them against your own position before acting. Your accountant should be part of this conversation.