The start of a new financial year is traditionally the time when tax changes come into effect.
While the high-profile rates such as Income Tax and VAT will not change, if you are a business owner or investor, you should be aware of how an impending increase in Dividend Tax rates could affect you.
Read about what is changing and what you can do to navigate the new rates, whether you are drawing income from your business using dividends or taking regular dividend income from your share portfolio.
Higher Dividend Tax rates were announced in the 2025 Budget
As you may be aware, the government has committed not to increase the rates of Income Tax, VAT, or employee National Insurance contributions (NICs) in this parliament.
This means that, to raise revenue, they have announced increases to Dividend Tax that come into effect from 6 April 2026.
The following new rates will apply from that date:
- Basic-rate taxpayers: 10.75% (up from 8.75%)
- Higher-rate taxpayers: 35.75% (up from 33.75%)
However, the rate for additional-rate taxpayers will remain unchanged at 39.35%.
The annual tax-free Dividend Allowance also remains unchanged at £500. If you receive dividends above that amount, you will likely pay more tax as a result of the rise.
These increases are liable to affect you if you take dividend income from investments that are not in a tax-efficient wrapper, such as an ISA or pension fund.
They will also have an impact on your income planning if you draw dividends from a business instead of, or alongside, a salary.
Dividends are a tax-efficient way to take income from your business
If you are a business owner, taking dividends from your company may be a key part of your long-term income strategy.
Dividends have historically been a tax-efficient option in this regard, with no NICs payable and lower rates of tax than if you were paying yourself a salary.
While the new rates, effective from April, are still lower than Income Tax rates, the differential is reduced. Consequently, you may need to reconsider your income strategy and how you draw wealth from your business.
You will also want to review your dividend strategy if your business is family-owned and pays shareholder-directors income through dividend distributions.
There are steps you can take to mitigate the effect of increased Dividend Tax
With the imminent increase in Dividend Tax, you may want to consider some strategies to mitigate its impact.
These could include:
- Bringing forward dividends to before April 2026 to make the most of the current lower rates. Clearly, this will be dependent on your business reserves and financial strategy.
- Reviewing your future income strategy to find the most tax-efficient blend of salary and dividends.
- Making the most of your spousal Dividend Allowance (if your business is family-owned), especially if your partner will be paying a lower rate of Dividend Tax than you.
We would recommend that any steps you take be considered part of your wider business income strategy and you seek expert guidance.
As an investor, you need to be aware of the impact of increased Dividend Tax
Even if you do not own a business, you may be affected by the increase in Dividend Tax if dividends form an important part of your income strategy.
You may have a portfolio of shares with high dividend yields that provide an income with a favourable tax rate.
Because of this, you need to be aware of the effects of the changes and appreciate that the net income from your investments may fall.
It is also worth ensuring that you are maximising your annual ISA allowance of £20,000, as dividends from Stocks and Shares ISAs are tax-free. As the allowance applies to individuals, you and your spouse or partner can invest up to £40,000 annually into ISAs.
Get in touch
If you would like to discuss how the impending increase in Dividend Tax could affect you as a business owner or investor, please get in touch.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.