Introduction
The Autumn Budget 2025, delivered on 26 November 2025, introduced significant changes to the way dividend income is taxed in the United Kingdom. From 6 April 2026, the ordinary (basic) and upper (higher) rates of income tax on dividends will each increase by 2 percentage points. The additional rate remains unchanged.
These changes will affect every shareholder who draws dividends above the annual tax-free dividend allowance, but they are particularly relevant for directors of owner-managed limited companies who rely on a salary-plus-dividends strategy to extract profits. In this article, we explain exactly what is changing, illustrate the financial impact with worked examples, and outline practical steps you can take before and after April 2026.
What Is Changing?
HM Revenue & Customs (HMRC) confirmed the following rate increases, effective from 6 April 2026 (the 2026/27 tax year):
Dividend Tax Rates: 2025/26 vs 2026/27
- Basic rate (ordinary): 8.75% → 10.75% (increase of 2 percentage points)
- Higher rate (upper): 33.75% → 35.75% (increase of 2 percentage points)
- Additional rate: 39.35% → 39.35% (no change)
Source: GOV.UK – Changes to tax rates for property, savings & dividend income, published 26 November 2025.
What Stays the Same?
Although the rates are rising, several important elements remain unchanged for 2026/27:
- Dividend allowance – The first £500 of dividend income per tax year remains tax-free.
- Personal allowance – The income tax personal allowance stays at £12,570.
- Corporation tax rates – The main rate remains at 25% (profits over £250,000) and the small profits rate stays at 19% (profits up to £50,000), with marginal relief in between.
- ISA exemption – Dividends received within an Individual Savings Account (ISA) remain completely tax-free.
- Reporting – The way you report and pay dividend tax through Self Assessment does not change.
Why Are Rates Increasing?
The Government has stated that these increases are designed to narrow the gap between tax paid on employment income and tax paid on income from assets such as dividends. Employees pay both income tax and National Insurance contributions on their earnings, whereas dividend income is only subject to income tax. By raising dividend tax rates, the Government aims to create a fairer balance between these two forms of income.
The Treasury estimates that this measure will raise approximately £280 million in additional tax revenue in 2026/27, rising to £1,390 million by 2030/31.
Worked Example: A Typical Director Scenario
Let us consider a common scenario for a limited company director in England, Wales or Northern Ireland who pays themselves a salary at the personal allowance threshold and takes dividends on top.
Assumptions
- Annual salary: £12,570 (covered by the personal allowance – no income tax)
- Dividend income: £40,000
- No other taxable income
Step-by-Step Calculation
1. Deduct the £500 dividend allowance: £40,000 – £500 = £39,500 taxable dividends.
2. The basic rate band extends to £50,270. After deducting the salary (£12,570), the remaining basic rate band available for dividends is £37,700.
3. All £39,500 of taxable dividends falls within the basic rate band (since £39,500 < £37,700 + £500 allowance).
Tax Comparison
- 2025/26: £39,500 × 8.75% = £3,456.25
- 2026/27: £39,500 × 10.75% = £4,246.25
- Additional tax payable from April 2026: £790.00 per year
In this example, the director will pay an extra £790 per year in dividend tax from April 2026. For directors who draw higher dividends that push them into the higher rate band, the additional cost will be even greater.
The Combined Tax Burden on Dividends
It is important to remember that dividends are paid from profits that have already been subject to corporation tax. The effective combined tax rate on profits distributed as dividends is therefore higher than the dividend tax rate alone.
The combined rate is calculated as: Corporation Tax + (1 – Corporation Tax) × Dividend Tax.
Small Profits (19% Corporation Tax) + Basic Rate Dividends
- 2025/26 combined rate: 26.07%
- 2026/27 combined rate: 27.69%
Main Rate (25% Corporation Tax) + Basic Rate Dividends
- 2025/26 combined rate: 31.56%
- 2026/27 combined rate: 33.06%
Main Rate (25% Corporation Tax) + Higher Rate Dividends
- 2025/26 combined rate: 50.31%
- 2026/27 combined rate: 51.81%
These figures illustrate how profits are taxed twice – first at the corporate level, then again when distributed as dividends – before reaching the shareholder.
Practical Steps to Consider
While the rate increase is relatively modest at 2 percentage points, it is part of a broader trend of rising tax costs for limited company owners. Here are some strategies to discuss with your accountant:
1. Review Your Salary and Dividend Mix
The optimal balance between salary and dividends may shift. A modest salary up to the personal allowance or the National Insurance threshold, combined with dividends, typically remains the most efficient structure, but the exact figures should be reviewed each year.
2. Make Use of Your Dividend Allowance
Ensure that each shareholder in the company uses their full £500 dividend allowance. If your spouse or civil partner is also a shareholder, this means up to £1,000 of combined dividend income can be received tax-free.
3. Consider Pension Contributions
Employer pension contributions made by the company are a tax-efficient way to extract value. They are deductible as a business expense for corporation tax purposes and are not subject to dividend tax or National Insurance (within annual and lifetime limits).
4. Use ISAs Where Possible
Dividends received on shares held within an ISA are completely tax-free. While you cannot hold your own company's shares in an ISA, any other dividend-paying investments can benefit from this wrapper. The annual ISA allowance for 2026/27 is £20,000.
5. Consider Timing of Dividend Declarations
If your company has distributable reserves and you were planning a large dividend, it may be worth considering whether to declare it before 6 April 2026 (at the current lower rates) or after, depending on your overall tax position. Speak to your accountant before taking action.
6. Retain Profits Within the Company
If you do not need all of the profits immediately, retaining them within the company avoids triggering dividend tax altogether. These funds can be used for business investment or held for future distribution at a time that is more tax-efficient.
Reporting and Payment Deadlines
The method for reporting and paying dividend tax does not change. If your dividend income exceeds the £500 allowance, you must report it through your Self Assessment tax return. Key dates for the 2026/27 tax year are:
- 5 October 2027 – Deadline to register for Self Assessment (if not already registered).
- 31 October 2027 – Paper tax return deadline.
- 31 January 2028 – Online tax return and payment deadline.
- 31 July 2028 – Second payment on account deadline (if applicable).
Looking Ahead: Further Changes from April 2027
The Autumn Budget 2025 also announced separate increases for savings and property income, effective from April 2027. The basic, higher and additional rates of tax on savings income will rise by 2 percentage points (to 22%, 42% and 47% respectively), and new standalone property income tax rates will be introduced at the same levels. These changes will be covered in a future update.
How Ollen Services Can Help
Navigating tax changes can be complex, but you do not have to do it alone. At Ollen Services, we help limited company directors and shareholders structure their income in the most tax-efficient way while remaining fully compliant with HMRC requirements.
Whether you need a full review of your salary and dividend strategy, advice on pension contributions, or simply want to understand how these changes affect your specific circumstances, our team is here to help.
Get in touch today to book a consultation and ensure you are prepared for the new tax year.