In her tax-raising Budget on 26 November 2025, the Chancellor announced that the dividend ordinary rate and the dividend upper rate are to rise by two percentage points from 6 April 2026. This will affect director/shareholders in personal and family companies who extract profits in the form of dividends.

How dividends are taxed

Dividends have their own tax rates, which are lower than the standard income tax rates. Dividend income which is not sheltered by the personal allowance or the dividend allowance is treated as the top slice of income. It is taxed at the dividend ordinary rate where it falls in the basic rate band, at the dividend upper rate where it falls in the higher rate band and at the dividend additional rate where it falls in the additional rate band.

For 2025/26, the dividend ordinary rate is 8.75%, the dividend upper rate is 33.75% and the dividend additional rate is 39.35%.

From 6 April 2026, the dividend ordinary rate rises to 10.75% and the dividend upper rate rises to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

All individuals are entitled to a dividend allowance, which is £500 for 2025/26 and remains at this level for 2026/27. The dividend allowance acts as a nil rate band; dividends sheltered by the allowance are tax-free. However, it uses up part of the band in which it falls.

Impact of the rise

Where profits are extracted as dividends and the shareholder is a basic or higher rate taxpayer, they will pay an additional £20 in tax on every £1,000 of dividends paid in 2026/27 as compared to 2025/26. A shareholder taking £50,000 of dividends a year will pay an additional £1,000 in tax.

Additional rate taxpayers are unaffected by the change.

Beating the rise

Where a personal or family company has retained profits, consideration should be given to paying dividends before 6 April 2026 if the tax hit will be lower than if the dividend is paid on or after that date. However, if dividends have already been paid to use up the basic rate band, there is no point paying a dividend if it would be taxed at the dividend upper rate if paid before 6 April 2026 and at the dividend ordinary rate if paid on or after that date; 10.75% is lower than 33.75%.

In a family company scenario with an alphabet share structure, to minimise the total tax paid on profits extracted as dividends, make sure shareholders’ dividend allowances and basic rate bands are used up before paying dividends taxable at the higher rates. Consideration could also be given to extracting profits in other ways, such as employer pension contributions or tax-free benefits in kind.

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