A Dividend Tax Rate Increase is on the way, and it will quietly reduce take-home income for many company owners. Announced in the November 2025 Budget, the change takes effect from 6 April 2026 and mainly affects those who extract profits through dividends.
For personal and family companies, dividends remain a common way to take money out. That makes this change important. While the rise looks modest, the real cost builds quickly once dividend levels increase. Planning ahead now matters far more than reacting later.
What changed in the November 2025 Budget
During the Budget on 26 November 2025, the Chancellor confirmed a two-percentage-point rise in dividend tax rates. The increase applies to the dividend ordinary rate and the dividend upper rate. No change applies to the dividend additional rate.
As a result, basic and higher rate taxpayers will pay more tax on dividends from April 2026. Anyone already paying the additional rate sees no direct change, although wider family planning may still be affected.
Dividend tax rates for 2025/26
For the current tax year, dividend tax rates stay as they are. After allowances, dividends falling into the basic rate band are taxed at 8.75%. Those falling into the higher rate band are taxed at 33.75%. Any dividends above that level face a rate of 39.35%.
These rates apply once other income has already used up part, or all, of the tax bands.
Dividend tax rates from 6 April 2026
From the start of the 2026/27 tax year, two rates increase. Dividends falling into the basic rate band will be taxed at 10.75%. Dividends in the higher rate band rise to 35.75%. The additional rate remains unchanged at 39.35%.
In practice, this means many directors will keep more of their profits inside the company, or rethink how and when dividends are paid.
How dividends are taxed
Dividends follow their own tax system and do not use income tax rates. Other income, such as salary or rental profits, fills tax bands first. Dividends then sit on top and are taxed according to whatever band remains available.
This stacking effect explains why dividend timing and structure matter. Even small changes in income can push dividends into higher bands and increase tax far more than expected.
How the dividend allowance works
Every individual has a £500 dividend allowance. This allowance remains unchanged for both 2025/26 and 2026/27. Dividends within it are tax-free, but the allowance still uses up part of the tax band where it sits.
That detail often surprises people. While no tax is paid on those dividends, they can still push later dividends into higher tax rates.
Who the dividend tax rate increase affects
The dividend tax rate increase affects anyone whose dividends fall into the basic or higher rate bands. From April 2026, those dividends will simply cost more tax.
People whose dividends already sit in the additional rate band will not see a rate change. Even so, family companies may still want to revisit how dividends are shared between shareholders.
What the increase costs in practice
A two-percentage-point rise adds £20 of extra tax for every £1,000 of dividends taxed at basic or higher rates. While that may not sound dramatic, it becomes noticeable as dividend levels rise.
Example – £50,000 of dividends
A shareholder taking £50,000 of dividends each year will pay an extra £1,000 in tax from 2026/27. That comparison assumes income levels and tax bands remain unchanged.
Planning before 6 April 2026
Companies with retained profits still have options. Paying dividends before April 2026 can reduce tax, but only where the dividend would fall into the same tax band either side of the change.
Rushing dividends out without checking band impact can easily increase tax instead of reducing it. Timing only helps when it is combined with proper analysis.
When paying dividends early helps
Early payment works where dividends sit in the same band whether paid before or after April 2026. In those cases, using the lower 2025/26 rates makes sense and reduces the overall tax bill.
When paying dividends early causes problems
Difficulties arise when early dividends push income into a higher band. Paying tax at 33.75% before April 2026 can be worse than waiting, even after the rate increase. Despite the rise, 10.75% remains far lower than 33.75%.
Family companies and alphabet shares
Family companies often have more flexibility. Alphabet share structures allow dividends to be allocated between shareholders in different proportions. When used correctly, this can significantly reduce total family tax.
Using allowances and basic rate bands first
Each shareholder brings their own dividend allowance and basic rate band. Using these fully before paying dividends at higher rates usually produces the best outcome. This approach spreads income and keeps more of it within lower tax bands.
Paperwork still matters
Dividend planning only works with proper documentation. Board minutes, dividend vouchers, and accurate payment records remain essential. Poor paperwork undermines otherwise sound planning.
Other ways to extract profits
Dividends are not the only option. Depending on circumstances, other extraction methods can reduce tax or support longer-term goals.
Employer pension contributions
Employer pension contributions can be highly tax-efficient and avoid dividend tax entirely. They also support retirement planning, although annual limits still apply.
Tax-free and low-tax benefits
Some benefits in kind remain tax-efficient when structured correctly. Eligibility rules matter, so checks are essential before relying on them.
What to do next
Dividend tax becomes more expensive from April 2026. Leaving things unchanged often leads to higher tax bills by default.
Now is the time to review dividend levels, timing, and family structures. Doing so before the end of the tax year gives you control rather than surprises.
If you want this reviewed calmly and properly, book a call with I Hate Numbers.
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