Date posted: 5th May 2026
The taxation of dividends changes from 6 April 2026, following measures announced in the 2025 Autumn Budget.
The ordinary and upper dividend tax rates increase by 2 percentage points, while the additional rate remains unchanged.
These changes will affect:
- Individual investors receiving dividend income from shares.
- Shareholders in personal and family companies extracting profits as dividends.
Dividend Allowance for 2026/27
All taxpayers continue to benefit from a dividend allowance of £500 for 2026/27, unchanged from 2025/26.
The dividend allowance:
- Acts as a 0% tax band (nil rate band).
- Still uses up part of the taxpayer’s basic or higher rate band.
- Applies regardless of income level.
Dividend Tax Rates for 2026/27
Dividends above the £500 allowance are treated as the top slice of income and taxed as follows:
- Basic rate band: 10.75% (up from 8.75%)
- Higher rate band: 35.75% (up from 33.75%)
- Additional rate band: 39.35% (unchanged)
For basic and higher rate taxpayers, this represents an additional £20 of tax for every £1,000 of dividend income.
Example: Dividend Tax for an Investor
Tony is retired and receives:
- Pension income: £20,000
- Dividend income: £30,000
For 2026/27:
- First £500 of dividends: tax-free
- Remaining £29,500 taxed at 10.75% = £3,171.25
Net dividend income: £26,828.75
For 2025/26:
- Tax liability: £2,581.25
- Net dividend income: £27,418.75
Impact: Tony is £590 worse off in 2026/27 due to the 2% rate increase.
Impact on Profit Extraction Strategies
For directors of personal and family companies, a common approach is:
- Salary set at the personal allowance (£12,570)
- Remaining profits extracted as dividends
The increase in dividend tax rates means higher personal tax liabilities where dividends fall within the basic or higher rate bands.
Example: Owner-Managed Company
Charlotte runs a personal company and expects:
- Salary: £12,570
- Dividends: £80,000
- No other income
For 2026/27:
- £500 covered by dividend allowance
- £37,200 taxed at 10.75% = £3,999
- £42,300 taxed at 35.75% = £15,122.25
Total dividend tax: £19,121.25
For 2025/26:
- Tax liability: £17,531.25
Impact: Charlotte is £1,590 worse off in 2026/27.
Who Is Not Affected?
Taxpayers whose dividend income falls entirely within the additional rate band will see no change, as the additional dividend rate remains at 39.35%.
Planning Considerations
With higher dividend tax rates from April 2026, it is important to review:
- Profit extraction strategies for owner-managed businesses
- Timing of dividend payments across tax years
- Use of spouse allowances and basic rate bands
Careful planning can help mitigate the increased tax burden.
As ever, if you have any queries, please get in touch.
