If you run a personal or family company and take money out as dividends, there’s a tax change on the horizon worth planning for now.
In her Budget on 26 November 2025, the Chancellor confirmed that dividend tax rates will increase from 6 April 2026. While the rise may sound modest, it can make a noticeable difference to the tax you pay each year if dividends are a key part of how you extract profits.
So, what’s changing – and what should you be thinking about?
A quick refresher: how dividends are taxed
Dividends are taxed differently from salary, which is why they’re often used by directors and shareholders.
Any dividend income not covered by your personal allowance or dividend allowance is taxed as the top slice of your income. That means the tax rate depends on which income tax band the dividends fall into.
For the 2025/26 tax year, the rates are:
- Basic rate (dividend ordinary rate): 8.75%
- Higher rate (dividend upper rate): 33.75%
- Additional rate: 39.35%
From 6 April 2026, the rates will be:
- Basic rate: 10.75%
- Higher rate: 35.75%
- Additional rate: unchanged at 39.35%
Everyone still benefits from the £500 dividend allowance, which remains frozen for 2026/27. Dividends within this allowance are tax-free, although they do still use up part of your tax band.
What will this actually cost you?
If you’re a basic or higher rate taxpayer, the increase means you’ll pay an extra £20 of tax for every £1,000 of dividends taken from April 2026 onwards.
To put that into context:
- £50,000 of dividends in a year = £1,000 more tax
If you’re an additional rate taxpayer, there’s no change – your dividend tax rate stays the same.
Can you reduce the impact?
With a bit of forward planning, often yes.
- Consider paying dividends before 6 April 2026
If your company has retained profits, it may make sense to pay dividends before the tax rise kicks in. This can be particularly effective if those dividends fall within the basic rate band.
That said, timing matters. If a dividend would be taxed at:
- 33.75% before April 2026, but
- 10.75% after April 2026,
then waiting could actually save tax. This is why individual advice is so important.
- Make the most of family share structures
In family companies with alphabet shares, careful planning can help ensure:
- Everyone’s dividend allowance is used first
- Basic rate bands are maximised
- Higher dividend tax rates are kept to a minimum
Done properly, this can significantly reduce the total tax paid across the family.
- Look beyond dividends
Dividends aren’t the only way to extract profits. Depending on your circumstances, alternatives such as:
- Employer pension contributions
- Tax-efficient benefits in kind
may be more effective – especially as dividend tax continues to creep up.
Final thoughts
Dividend tax is still lower than income tax, but the gap is narrowing. For many director-shareholders, this increase is a reminder that regular reviews of how profits are taken out of the business are essential.
If you’re unsure whether you should bring dividends forward, change your approach, or explore other options, we can help.
If you’d like tailored advice, get in touch with Jon or the team at Jon Davies Accountants. We’ll look at your numbers, explain your options in plain English, and help you make the most tax-efficient decision for you and your business.
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Any questions?
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