Dividend Tax Rising to 10.75% in April 2026 — What It Costs You

What Is Changing

From 6 April 2026, every dividend tax rate increases by 1.25 percentage points. This is not a new announcement — the government confirmed the rise at the Autumn Budget — but for most owner-directors it has been easy to overlook among the other changes landing the same day.

Here are the new rates side by side:

The dividend allowance remains at £500. That means the first £500 of dividend income is still tax-free, but everything above that is taxed at the new higher rates.

Who Is Affected

If you run a UK limited company and pay yourself partly in dividends — which the vast majority of owner-directors do — this affects you directly. It also catches anyone with significant share portfolios or investment income outside an ISA.

The impact falls hardest on directors who rely on dividends as their primary extraction method. A sole director taking a modest salary plus dividends is the textbook case, and the numbers below show exactly what changes.

Worked Example: Director Taking £50,000 in Dividends

Let us walk through a typical scenario. Sarah runs a consultancy through her limited company. She pays herself the optimal director's salary of £12,570 (the personal allowance) and takes £50,000 in dividends on top.

2025/26 (current year)

• Dividend allowance: £500 at 0% = £0
• Basic rate band remaining: £37,200 at 8.75% = £3,255
• Higher rate band: £12,300 at 33.75% = £4,151.25
• Total dividend tax: £7,406.25

2026/27 (from April 2026)

• Dividend allowance: £500 at 0% = £0
• Basic rate band remaining: £37,200 at 10.75% = £3,999
• Higher rate band: £12,300 at 35.75% = £4,397.25
• Total dividend tax: £8,396.25

Additional cost: £990 per year — just under £1,000 more for exactly the same level of income.

If Sarah's dividends were higher, the cost escalates. A director taking £80,000 in dividends would pay roughly £1,600 more per year. At £100,000 in dividends, the increase is around £2,000.

The Salary/Dividend Split Gets More Complicated

For years, the standard advice for owner-directors has been straightforward: take a small salary at or near the personal allowance, extract the rest as dividends. That strategy still works — dividends remain cheaper than salary — but the gap is narrowing.

Consider the numbers. Employer National Insurance has already risen to 15% from April 2025, and now dividend tax rates are climbing too. The combined effect is that both methods of extracting profit have become more expensive.

Despite the increase, dividends remain the more tax-efficient route for most directors. Taking £1,000 as salary costs roughly £138 in employer NI plus up to £400 in income tax and employee NI. Taking that same £1,000 as a dividend costs £107.50 at the basic rate or £357.50 at the higher rate — with no NI on either side.

The decision tree has not changed, but the optimal numbers for 2026/27 are worth recalculating for your specific circumstances.

Key Dates

• 5 April 2026 — last day to declare dividends at the current lower rates
• 6 April 2026 — new dividend tax rates take effect
• 31 January 2027 — self-assessment deadline for 2025/26 (the last year at old rates)
• 31 January 2028 — self-assessment deadline for 2026/27 (the first year at new rates)

What to Do Before 5 April

There are a few legitimate steps you can take before the new tax year:

1. Consider an interim dividend now. If your company has retained profits and you were planning to take dividends later in 2026, taking them before 6 April means they are taxed at the current lower rates. This must be a genuine dividend — the company needs sufficient distributable reserves, and you must document it properly with board minutes.

2. Check your distributable reserves. You can only pay dividends out of accumulated realised profits. If you are not sure whether your company has enough reserves, review your last filed accounts or ask your accountant.

3. Recalculate your salary/dividend split. The optimal split changes every April. With dividend rates rising and employer NI already at 15%, it is worth modelling the numbers for your specific income level. Small changes in salary can make a meaningful difference at the margins.

4. Consider pension contributions. Employer pension contributions remain free of both corporation tax and NI. If you have headroom in your annual allowance (£60,000 for most people), redirecting some profit into a pension rather than dividends avoids the tax increase entirely.

5. Use your ISA allowance. If your company has surplus cash and you have already extracted it, putting up to £20,000 into a stocks and shares ISA shelters future dividend income from tax completely.

The Bigger Picture

This dividend tax rise does not exist in isolation. It lands alongside frozen income tax thresholds that push more of your income into higher bands, a higher employer NI rate that makes salary more expensive, and changes to capital allowances that affect how much you can deduct from profits.

The cumulative effect is significant. A director who earned and extracted the same amount in 2023/24 versus 2026/27 will pay noticeably more tax across every measure. Planning ahead — rather than reacting after April — is the only way to minimise the impact.

Frequently Asked Questions

Does the dividend allowance change in April 2026?

No. The dividend allowance remains at £500 for 2026/27. It was reduced from £1,000 to £500 in April 2024 and there are no further reductions announced. The first £500 of dividend income continues to be tax-free regardless of which band you fall into.

Can I declare a large dividend before April to lock in the lower rate?

Yes, provided your company has sufficient distributable reserves and you properly document the dividend with board minutes and a dividend voucher. The dividend is taxed in the year it is paid, not the year the profits were earned. However, you must actually receive or have access to the funds — you cannot backdate a dividend.

Are dividends still more tax-efficient than salary?

For most owner-directors, yes. Even at the new higher rates, dividends carry no National Insurance — neither employer nor employee. Salary attracts employer NI at 15% plus employee NI at 8%, making it significantly more expensive in most scenarios. The exact crossover point depends on your total income, which is why recalculating your split each year matters.

How does this interact with the frozen income tax thresholds?

The frozen thresholds mean more of your dividend income falls into the higher rate band each year, even if your dividends stay the same. Combined with the rate increase, some directors will face a double hit — paying a higher percentage on a larger portion of their income. This makes proactive tax planning more important than ever.

AccountsOS calculates your optimal salary/dividend split automatically based on your company's actual numbers. Try the salary and dividend calculator to model different scenarios for 2026/27.