Increasing Tax on Dividends: 2026 Changes
Dividend tax rates increased in 2026, raising bills for basic- and higher-rate taxpayers.
Increasing tax on dividends became a significant issue for investors and company directors when the ordinary and upper dividend rates rose from 6 April 2026. The change affects taxable dividends outside protected accounts such as ISAs.
The increase does not affect every dividend recipient equally. The amount payable depends on total income, available Personal Allowance, the £500 Dividend Allowance and the tax bands into which the dividends fall.
This article focuses specifically on the 2026 Budget dividend tax increase. It does not repeat the wider rules for Corporation Tax, director remuneration or general tax planning, which are covered by dedicated guides and calculators.
What Is the Dividend Tax Increase?
From 6 April 2026, the ordinary dividend rate increased to 10.75% and the upper rate increased to 35.75%, while the additional rate remained 39.35%.
The ordinary dividend rate increased from 8.75% in 2025/26 to 10.75% in 2026/27. The upper rate increased from 33.75% to 35.75%. Both increases were two percentage points.
The additional dividend rate remains unchanged at 39.35%. Therefore, an additional-rate taxpayer does not face a direct percentage-rate increase under this particular reform, although changes in income or allowances can still alter the final liability.
According to HMRC’s dividend tax policy update, the new ordinary and upper rates apply from 6 April 2026. The change forms part of the wider measures covered in the UK tax changes guide.
What Changed in the Budget?
Budget 2025 increased the ordinary and upper dividend tax rates by two percentage points but did not reduce the £500 Dividend Allowance or increase the additional rate.
Budget 2025 announced the rate increase, which was subsequently included in the Finance Act 2026. It applies to dividend income received during the 2026/27 tax year and later years unless another legislative change is made.
The reform should not be described as a proposed increase for 2026/27 because it is now in force. “Budget dividend tax proposal” may describe the measure at its announcement stage, but the current position is an enacted rate change.
The £500 Dividend Allowance remains unchanged. The allowance had already fallen from £1,000 to £500 in April 2024, but Budget 2025 did not introduce another reduction for 2026/27. The additional dividend rate also remains at its previous level.
| Dividend tax band | 2025/26 rate | 2026/27 rate | Change |
|---|---|---|---|
| Ordinary rate | 8.75% | 10.75% | Increase of 2 percentage points |
| Upper rate | 33.75% | 35.75% | Increase of 2 percentage points |
| Additional rate | 39.35% | 39.35% | No change |
| Dividend Allowance | £500 | £500 | No change |
Who Pays More Dividend Tax?
Basic- and higher-rate taxpayers with taxable dividends above their available allowances generally pay more, while the additional dividend rate itself did not increase.
The increase can affect individual investors holding dividend-paying assets outside an ISA, owner-managed company shareholders and directors receiving part of their income through dividends. Trustees and partners receiving relevant distributions can also be affected under their applicable rules.
A basic-rate taxpayer whose taxable dividends remain entirely within the ordinary-rate band pays two percentage points more than under the 2025/26 rate. A higher-rate taxpayer whose taxable dividends remain entirely within the upper-rate band also pays two percentage points more. For every £10,000 of taxable dividends remaining within either of those bands, the rate change alone adds £200.
That simplified comparison assumes the full dividend amount remains within one tax band. In practice, dividends are added to other income and can cross more than one band. The calculation can also be affected by unused Personal Allowance, the £500 Dividend Allowance and other taxable income.
People whose dividends are fully covered by their Personal Allowance and Dividend Allowance may continue to have no dividend tax to pay. Dividends held within a qualifying ISA are not taxed, although ISA subscription and investment rules still apply.
Dividend Tax Rates and Allowances
For 2026/27, taxable dividends above available allowances are charged at 10.75%, 35.75% or 39.35%, depending on the recipient’s Income Tax band.
According to GOV.UK dividend guidance, dividend income is added to other income when determining the applicable tax band. This means a person can pay dividend tax at more than one rate if the dividends cross a band boundary.
The £500 Dividend Allowance is a zero-rate band rather than a deduction from total income. Dividends covered by it are taxed at 0%, but they still form part of the income calculation that determines the rate applying to dividends above the allowance.
The standard Personal Allowance may also cover some dividend income where it has not already been used by salary, pension, property or other income. It is reduced where adjusted net income exceeds £100,000 and is normally removed completely at £125,140.
The dividend tax calculator can estimate a liability using dividend income and other taxable income. The result should be checked where foreign dividends, trusts, relief claims or unusual company distributions are involved.
How the Increase Affects Company Directors
Directors taking taxable dividends may pay more personal tax, making it important to compare salary, dividends, pensions and retained company profit together.
A limited company can pay dividends only from available profits accumulated in the current or previous financial years. According to GOV.UK company guidance, dividends cannot be deducted as business expenses when calculating Corporation Tax. The company must also declare the dividend properly and retain minutes and dividend vouchers.
The increase does not make salary automatically better than dividends. Salary can create Income Tax, employee National Insurance and employer National Insurance, while dividends are paid from profits that have already been exposed to Corporation Tax. A proper comparison must include both the company and personal tax positions.
Directors should also consider how much money they genuinely need to withdraw. Retaining profit can defer personal dividend tax, but it does not remove Corporation Tax or guarantee a lower future extraction rate. Cash retained by the company continues to belong to the company rather than the shareholder personally.
Use the salary and dividend calculator to compare extraction methods. The director salary calculator and Corporation Tax calculator can identify costs that a dividend-only calculation may miss.
The rate charged on certain loans or benefits provided by close companies to participators is linked to the dividend upper rate. HMRC’s technical note confirms that this linked company charge also increased to 35.75%. Director’s loan decisions should therefore not be treated as a simple substitute for salary or dividends.
How Investors Are Affected
Investors holding dividend-producing assets outside an ISA can face higher tax on distributions that exceed their available Personal Allowance and Dividend Allowance.
The tax increase affects dividends rather than capital growth. Selling an investment can create a separate Capital Gains Tax calculation, while retaining it may continue to produce taxable dividend income. Investment decisions should therefore consider income, gains, risk and portfolio suitability together.
For an accumulation fund, distributions reinvested within the fund can still represent taxable income when the investment is held outside a tax-protected account. Automatic reinvestment does not necessarily prevent a dividend or distribution from being taxable. Investors should retain tax statements supplied by the platform or fund provider.
According to GOV.UK ISA guidance, eligible income and gains generated inside an ISA are not taxed. The overall ISA subscription limit is £20,000 for 2026/27. Moving existing investments into an ISA can involve a disposal and repurchase unless a specific transfer rule applies.
Investors should not select shares solely because they pay little or no dividend tax. Investment quality, diversification, charges, risk and total return remain important. Tax efficiency cannot compensate for an unsuitable or poorly performing investment.
How to Reduce Dividend Tax Legally
Dividend tax may be reduced legally by using available allowances, holding eligible investments within an ISA and reviewing company withdrawals or ownership before dividends arise.
The Dividend Allowance is applied automatically when calculating the liability. It cannot normally be transferred to another person or carried forward when unused. Receiving an unnecessary dividend merely to use the allowance may also remove cash that the company needs for working capital.
A Stocks and Shares ISA can shelter future eligible dividends from Income Tax. However, transferring an existing portfolio into an ISA often requires a sale outside the ISA, which can create Capital Gains Tax. Platform charges, market movement and investment suitability should also be considered.
Contributing to a registered pension can provide tax relief and may reduce adjusted net income, depending on the contribution method and personal circumstances. Dividends arising within the pension are not taxed personally as they arise. Pension contribution limits and restrictions on accessing the money mean this is a long-term financial decision rather than a dividend-tax workaround.
A genuine transfer of shares between spouses or civil partners can change who receives future dividends. However, beneficial ownership must actually transfer, and company-law, settlements, separation and anti-avoidance rules can affect the result. Paper arrangements that leave the original owner in control should not be used to redirect income artificially.
Owner-managed companies can compare salary, dividends, employer pension contributions and retained profit, but no extraction method is universally optimal. The dividend and pension calculator can help compare two possible uses of company funds, while the broader business tax planning guide covers cash flow and commercial considerations.
How to Report Dividend Income
Taxable dividend income must be reported to HMRC using the method required for the amount received and whether the recipient already completes Self Assessment.
According to HMRC’s dividend reporting guidance, dividends within the available Dividend Allowance do not need to be reported solely for dividend tax purposes. If a person already completes Self Assessment, dividend income must be included in the return.
Where taxable dividend income is no more than £10,000 and the recipient does not normally complete Self Assessment, they can generally contact HMRC or ask for their tax code to be updated. HMRC must normally be told after the tax year ends and before 5 October.
Dividend income above £10,000 ordinarily requires a Self Assessment return. Someone not already registered must generally notify HMRC by 5 October following the end of the tax year. Foreign dividends and other reporting obligations can require a return even where different limits apply.
Common Dividend Tax Mistakes
Common mistakes include using the old rates, treating the Dividend Allowance as a deduction, omitting reinvested distributions and paying dividends without sufficient company profit.
- Using the 8.75% or 33.75% rates for dividends received after 5 April 2026.
- Assuming the £500 Dividend Allowance removes dividends from total income.
- Applying the additional rate increase even though it remains 39.35%.
- Ignoring reinvested dividends or fund distributions held outside an ISA.
- Failing to report taxable dividend income to HMRC.
- Paying company dividends without sufficient distributable profits.
- Missing dividend minutes or vouchers.
- Treating dividends as deductible Corporation Tax expenses.
- Comparing salary and dividends without including employer National Insurance.
- Using a director’s loan as an undocumented alternative to a dividend.
Company bank transfers do not become dividends simply because the transaction description uses that word. The company must have sufficient distributable profit and complete the required approval and documentation. An unsupported withdrawal may instead create a director’s loan or another taxable payment.
This guide provides general information about increasing tax on dividends using rules available as of 21 July 2026. The amount payable depends on total income, allowances, residence, company records and individual circumstances. Consult a qualified tax adviser or accountant for personalised advice and check GOV.UK for current rates and reporting requirements.
Written by
Mia Carragher
Mia writes beginner-friendly UK tax and personal finance guides, with a focus on income tax, National Insurance, salary calculators and simple HMRC explainers.
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