Changes to the taxation of dividends from April 2026

In the Autumn 2025 Budget, the government announced a change to the taxation of dividends on individuals, which will lead to an increased tax liability for the majority of shareholders.

What's changing? 

For the 2025/26 tax year, dividends in excess of the £500 tax-free allowance are subject to income tax at rates of 8.75% (Basic rate), 33.75% (Higher rate) and 39.35% (Additional rate), depending on the level of an individual’s other income.

However, the government has announced that from 6 April 2026, the basic and higher rates of dividend tax will increase by 2% to 10.75% and 35.75% respectively. The rate of dividend tax for additional rate taxpayers will remain at 39.35%.

What does this mean for business owners? 

In practice, most company owners who pay themselves dividends will see their tax bill increase under the new rules.

For example, a company owner who pays themselves a £12k salary and tops up with a £38k dividend will see their tax bill increase by approximately £740 in 2026/27.

Do company owners have other cash extraction alternatives?

Although paying dividends remains a relatively tax-efficient way to extract cash from a company, we have explored several alternatives that can mitigate the additional tax for the recipient.

One common alternative is for the company to make pension contributions on behalf of the shareholder. Providing the contributions are within certain limits, they can be tax deductible for the company and non-taxable for the individual. As always, appropriate investment advice should be sought before organising any pension contributions.

Find the most efficient method for your business

This increase in the tax rate on dividends means it could affect the tax efficiency of your current remuneration plan; therefore, it is best to seek advice to ensure you are extracting value from your company in an efficient manner. If you would like further specific advice on how you will be affected, and to discuss alternative ways of extracting value from your company, please get in touch with us.