5 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.