The Government has confirmed that dividend tax rates will increase from April 2026, while key personal tax thresholds will remain frozen until at least 2028.
For limited company directors who take income through a combination of salary and dividends, this change will reduce take-home income even if earnings stay exactly the same.
In this guide, we explain how the April 2026 dividend tax rise will affect director–shareholders, using two common dividend scenarios to show the potential impact.
What Is Changing From April 2026?
Several tax adjustments will affect directors who extract profits through dividends.
Higher Dividend Tax Rates
From 6 April 2026, dividend tax rates will increase:
- Basic rate dividends: 8.75% → 10.75%
- Higher rate dividends: 33.75% → 35.75%
- Additional rate: remains 39.35%
While the changes may appear small, they can noticeably affect the net income directors receive from their companies.
Dividend Allowance Remains Low
The dividend allowance stays at £500, meaning most dividend income will continue to be taxable. This allowance was previously £2,000 before reductions in recent years, so the amount of tax-free dividends available is now minimal.
Personal Tax Thresholds Remain Frozen
Another important factor is the continued freeze on income tax thresholds. The key figures remain unchanged:
- Personal Allowance: £12,570
- Basic rate threshold: £50,270
Because these limits are frozen while incomes gradually increase, more individuals will drift into higher tax bands over time. This phenomenon, often called “fiscal drag”, means the real tax burden grows even without explicit tax increases.
Example: Director Taking £25,000 in Dividends
Many owner-managed businesses use a common structure of taking a salary equal to the personal allowance (£12,570) alongside dividends.
This approach avoids National Insurance while allowing the remainder of profits to be extracted as dividends.
Current Position (2025/26)
Assuming £25,000 in dividends:
- £500 dividend allowance (tax-free)
- £24,500 taxed at 8.75%
Dividend tax payable: £2,144
This results in:
- Net dividends: £22,856
- Total take-home income (including salary): £35,426
Position From April 2026
From April 2026, the same dividend level will be taxed at 10.75%.
Dividend tax payable: £2,634
This results in:
- Net dividends: £22,366
- Total take-home income: £34,936
Impact
A director receiving £25,000 in dividends will take home £490 less per year under the new rules.
Example: Director Taking £38,000 in Dividends
Higher dividend levels naturally amplify the impact of tax increases.
Current Position (2025/26)
Assuming £38,000 in dividends:
- £500 allowance
- £37,500 taxed at 8.75%
Dividend tax payable: £3,281
Resulting in:
- Net dividends: £34,719
- Total take-home income: £47,289
Position From April 2026
From April 2026 the same dividend income will be taxed at 10.75%.
Dividend tax payable: £4,031
Resulting in:
- Net dividends: £33,969
- Total take-home income: £46,539
Impact
A director receiving £38,000 in dividends will be approximately £750 worse off each year once the new tax rates apply.
What the Dividend Tax Changes Mean for Director–Shareholders
Although the increase in dividend tax rates may seem modest, the combined effect of higher tax rates and frozen thresholds gradually reduces the tax efficiency of dividend income.
For owner-managed businesses, this makes it even more important to review how profits are extracted from the company.
A few strategic considerations include:
Bringing forward dividends before April 2026 may reduce the tax paid on profits already available for distribution. Pension contributions can also become more attractive because they provide tax relief while building long-term retirement savings.
Directors should also remain aware that frozen tax bands increase the likelihood of crossing into higher-rate tax thresholds over time.
Because of these factors, reviewing remuneration strategies annually is becoming increasingly important for limited company directors.
if you would like to know more about these changes, please feel free to contact us, we’d be only too happy to help.
