| Ordinary and upper Dividend Tax rates rise by two percentage points | Dividend Allowance remains £500 per tax year outside ISAs | Reviewing your combination of salary, dividends and pension can improve efficiency |
From April 2026, changes to Dividend Tax kick in. While most of the Chancellor’s tax announcements from her November Budget will commence towards the end of this Parliament, this was one of the most imminent changes.
Specifically, two bands increase by two percentage points. The ordinary rate rises from 8.75% to 10.75%, and the upper rate from 33.75% to 35.75%. The additional rate remains unchanged at 39.35%, although you may still be affected depending on your dividend income. The rate payable depends on your marginal Income Tax band.
All taxpayers have a Dividend Allowance, allowing individuals to earn up to £500 of dividend income per tax year outside of an Individual Savings Account (ISA) without paying tax on it; this is in addition to the Personal Allowance of £12,570. With dividends received within an ISA being tax free, so too are those received within a Self-Invested Personal Pension (SIPP) or by registered pension schemes. Importantly, dividends above the Dividend Allowance received on investments held outside of these tax-advantaged wrappers are subject to Income Tax.
How could it impact you
Changes to Dividend Tax mean that some business owners and investors could see their tax bills increase. While over 90% of UK taxpayers don’t pay Dividend Tax at all, those who regularly take dividends – particularly company directors – may feel the impact over time, especially as profits grow. Even small increases in tax rates can add up, making it important to review how you extract income from your business. You will not be impacted if you are an additional rate taxpayer.
Do you need to do anything?
The good news is that dividends can still form part of a tax-efficient strategy when combined with salary, pension contributions and ISAs. With the right balance and regular reviews, it’s possible to continue paying yourself efficiently while staying fully compliant with HMRC. If you’re taking dividends now, or planning to in the future, this is an ideal time to sense-check your approach and make sure you’re not paying more tax than you need to.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. Tax legislation and rates can change, and their application depends on individual circumstances.
