As announced at the time of the 2025 Autumn Budget, the ordinary and upper dividend tax rates are increased by two percentage points from 6 April 2026. The additional dividend rate remains unchanged. The increase will affect those with investments in shares who receive dividend income and also shareholders in personal and family companies who extract profits by way of dividends.

All taxpayers, regardless of the rate at which they pay tax, receive a dividend allowance. This is set at £500 for 2026/27, unchanged from the previous year. The dividend allowance acts as a nil rate band, and dividends sheltered by the allowance are received free of tax. However, the allowance uses up part of the tax band in which it falls.

Where dividends are not sheltered by the dividend allowance, they are treated as the top slice of income and taxed at the dividend tax rates. The dividend ordinary rate applies to dividends falling within the basic rate band and is set at 10.75% for 2026/27 (up from 8.75% for 2025/26). Dividends falling in the higher rate band are taxed at the dividend upper rate which is set at 35.75% for 2026/27 (up from 33.75% for 2025/26). Where dividends fall in the additional rate band, they are taxed at the dividend additional rate, which remains at 39.35% for 2026/27.

The tax rises mean that taxpayers paying tax on their dividends at the ordinary or upper dividend rates will pay an additional £20 in tax for every £1,000 of dividend income in 2026/27.

Example

John is retired. He receives a pension of £20,000 each year. He has invested in shares over the years and receives dividends of £30,000 a year which boost his retirement income.

For 2026/27, he will pay tax of £3,171.25 on his dividend income. The first £500 of dividends is taxfree, being sheltered by the dividend allowance of £500. The remaining £29,500 is taxed at the dividend ordinary rate of 10.75%. After tax, John retains £26,828.75.

In 2025/26, he also received dividend income of £30,000. However, his tax bill for that year was £2,581.25, leaving John with £27,418.75 after tax.

As a result of the rise in the dividend ordinary rate, John is £590 worse off in 2026/27 (£29,500 @ 2%).

Impact on profit extraction

For directors of personal and family companies, a popular profit extraction strategy is to take a salary equal to the personal allowance and to extract further profits as dividends. Where the dividends are taxed at the ordinary or upper dividend rates, the director/shareholder will pay more tax on those dividends than in 2025/26.

Example

Julia runs a personal company. She prepares accounts to 31 March each year. In the year to 31 March 2027, she expects to make a profit of £80,000 after tax, having taken a salary of £12,570 from the company. She extracts the profits as dividends. Apart from the salary from the company, she has no other income.

The first £500 of the dividends are sheltered by her dividend allowance. The dividend allowance uses up £500 of the basic rate band, leaving £37,200 available.

The first £37,200 of the remaining dividend falls in the basic rate band and is taxed at the dividend ordinary rate of 10.75% – a tax hit of £3,999.

The remaining £42,300 of the dividend falls in the higher rate band and is taxed at the dividend upper rate of 35.75% – a tax hit of £15,122.25.

Consequently, Julia pays tax of £19,121.25 on her dividend of £80,000, leaving her with £60,878.75.

Assuming she also took a dividend of £80,000 in 2025/26, she would have paid tax of £17,531.25, leaving her with £62,468.75. As a result of the increase in the ordinary and upper dividend tax rates, she is £1,590 worse off in 2026/27 (£79,500 @ 2%). Taxpayers whose dividends are taxed at the dividend additional rate are unaffected by these changes.

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