Dividend Tax Increase 2026: What It Means for Owner-Managed and Family Companies

In the Autumn Budget delivered on 26 November 2025, the Chancellor confirmed an increase in dividend tax rates, effective from 6 April 2026. This change will directly affect director-shareholders of personal and family-run companies who take profits out of their business through dividends.

The dividend ordinary rate and dividend upper rate will both rise by two percentage points, increasing the overall tax cost for many business owners.

How Dividend Tax Works

Dividends are taxed differently from salary and other income. They benefit from lower tax rates than standard income tax and are always treated as the top slice of income after allowances have been applied.

Dividend income is taxed as follows:

• At the dividend ordinary rate when it falls within the basic rate band

• At the dividend upper rate when it falls within the higher rate band

• At the dividend additional rate when it falls within the additional rate band

Dividend Tax Rates

2025/26 tax year

• Ordinary rate: 8.75%

• Upper rate: 33.75%

• Additional rate: 39.35%

From 6 April 2026

• Ordinary rate increases to 10.75%

• Upper rate increases to 35.75%

• Additional rate remains unchanged at 39.35%
  

The Dividend Allowance

Every individual is entitled to a £500 dividend allowance, which remains unchanged for both 2025/26 and 2026/27.

Dividends covered by this allowance are tax-free, but they still use up part of the tax band in which they fall. This means the allowance does not increase your basic or higher rate bands—it simply applies a nil tax rate to the first £500 of dividends.

What the Rate Increase Means in Practice

For shareholders who are basic or higher rate taxpayers, the increase will result in paying £20 more tax for every £1,000 of dividends received in the 2026/27 tax year compared to 2025/26.

For example:

• A shareholder receiving £50,000 in dividends per year will pay £1,000 more in dividend tax.

Those who are additional rate taxpayers will not be affected, as the top rate remains unchanged.

Planning Ahead: How to Reduce the Impact

Pay Dividends Before 6 April 2026

If your company has retained profits, it may be beneficial to declare and pay dividends before 6 April 2026, provided the tax payable at current rates is lower than under the new rates.

However, timing is important. If dividends paid before April 2026 would fall into the higher rate band, but the same dividend paid after that date would fall into the basic rate band, delaying payment may actually result in lower tax, as 10.75% is lower than 33.75%.

Using Family Share Structures Effectively

In family companies with alphabet or multiple share classes, careful planning can significantly reduce the overall tax burden.

To maximise tax efficiency:

• Ensure each shareholder fully uses their £500 dividend allowance

• Make full use of each shareholder’s basic rate band

• Avoid paying dividends that push income into higher tax bands unnecessarily

Alternative Ways to Extract Profits

Dividend planning isn’t the only option. Business owners may also consider:

• Employer pension contributions

• Tax-efficient benefits in kind

• Other remuneration strategies that reduce overall tax exposure

Professional advice is recommended to ensure these options align with both tax rules and long-term business goals.

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