If you’re taking dividends from your company or building investment income, this is one of those updates you really don’t want to ignore.

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The Big Change: Dividend Tax Rates Are Increasing

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From 6 April 2026, dividend tax rates are rising by 2% for basic and higher rate taxpayers. The basic rate moves from 8.75% to 10.75%, and the higher rate increases from 33.75% to 35.75%. The additional rate stays at 39.35%.

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In simple terms — if you’re a basic or higher rate taxpayer, your dividend tax bill is going up.

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The Dividend Allowance (Still Low)

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The dividend allowance remains at just £500 per year. This means the first £500 of dividend income is tax-free, and everything above that is taxed at your applicable dividend rate.

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This allowance has been reduced significantly over the past few years and is now at a level where it offers minimal relief.

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How Dividend Tax Actually Works

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Dividend tax doesn’t sit on its own — it stacks on top of your income.

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- First, you use your personal allowance (currently £12,570).

- After that, the £500 dividend allowance is applied. Any remaining dividends are then taxed based on your total income band.

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So your salary and dividends are always looked at together — not separately. This is where many people underestimate their tax exposure.

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What This Means in Real Terms

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If you’re taking £20,000 in dividends above the allowance, the increase is noticeable. As a basic rate taxpayer, your tax would increase by around £400 purely due to the rate change — with no increase in income.

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For higher rate taxpayers, the impact is even greater.

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Why Is This Happening?

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The government’s aim is to bring dividend income closer in line with earned income. Dividends don’t attract National Insurance, which has historically made them more tax-efficient, especially for company directors. These changes reduce that advantage and increase overall tax take.

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The Hidden Problem: Fiscal Drag

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Even beyond the rate increases, there’s another issue at play. Tax bands are frozen until at least 2028, meaning as your income grows, more of it gets pulled into higher tax bands.

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This is known as fiscal drag — and it quietly increases your tax bill without any official “rate change”.

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What This Means for Business Owners

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If you run a limited company, this is where strategy becomes important. The traditional approach of taking a low salary and topping up with dividends still works — but it’s not as efficient as it used to be.

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With higher dividend tax rates, the balance between salary and dividends should now be reviewed properly.

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Smart Planning Moves

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No fluff — here’s what actually matters:

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- Revisit your salary and dividend mix. What worked last year may no longer be optimal.

- Consider using a spouse’s allowances where appropriate. Splitting shareholding can utilise multiple tax bands and allowances.

- Maximise ISA usage. Dividends within an ISA remain completely tax-free.

- Look at pension contributions. These can reduce your taxable income and potentially keep you out of higher dividend tax brackets.

- Think about timing. Taking dividends before or after April 2026 can make a real difference to your tax bill.

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Final Thought

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Dividend tax used to be a clear advantage. Now, it’s still useful — but no longer something you can set and forget. If you’re regularly taking dividends, this is the time to review your strategy and stay ahead of the changes rather than reacting after the fact.

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Need more advice and assictance? Contact us info@xenithwealth.co.uk