The April 2026 Dividend Tax Hike: What It Means for Business Owners
Limited company directors and shareholders are now working through the practical consequences of a further rise in dividend tax, which will take effect from April 2026.
The government confirmed in its policy paper on changes to tax rates for property, savings and dividend income that dividend tax rates for basic and higher-rate taxpayers will increase by two percentage points from 6 April 2026.
From that date, the rates will be:
- Basic rate: 8.75% rising to 10.75%
- Higher rate: 33.75% rising to 35.75%
- Additional rate: unchanged at 39.35%
- Dividend allowance: remaining at £500
For owner-managed companies, where directors typically extract profits using a low salary topped up with dividends, the increase is just the latest in a series of tax rises since the original April 2016 overhaul of dividend taxation.
Dividend tax in a wider context
Alongside the increase in dividend tax rates over the past decade, the dividend allowance has fallen from £5,000 in 2016/17 to just £500 today.
At the same time, Corporation Tax has risen for many companies, with a 25% main rate and marginal relief applying to profits between £50,000 and £250,000.
Taken together, Corporation Tax and dividend tax now represent a much larger tax burden than they did a decade ago. The tax gap between owner-directors and employees has narrowed considerably.
Dividends held inside ISAs or pensions remain outside the scope of the April 2026 tax hike.
Is it worth taking extra dividends before April 2026?
It is inevitable that some directors will consider declaring dividends before 6 April 2026 to take advantage of the lower rates. In some cases, this may be prudent.
However, dividend planning rarely operates in isolation.
Christian Hickmott, Managing Director of Integro Accounting, said:
Bringing dividend declarations forward ahead of the April 2026 tax rise should not be considered in isolation. Once all income sources are taken into account, additional dividends may increase a director’s marginal rate and negate any potential benefit.
This principle applies ahead of any tax rise, as seen with the 2023 Corporation Tax increase.
For this reason, we recommend speaking to your accountant, who can assess your tax position for the year as a whole.
Bringing income into the 2025/26 tax year can push total earnings into a higher band, trigger taper allowances, or interact with other thresholds.
In some scenarios, the apparent gain from avoiding the extra 2p is reduced or eliminated completely due to marginal tax rates.
What the 2p rise means in practice
On paper, a two-point rise may not seem significant, but many owner-managers will be at least £1,000 worse off.
A director drawing £30,000 to £50,000 in annual dividends will see several hundred pounds more go to HMRC each year from April 2026.
Those with incomes over £100,000 could face up to £2,493 in extra dividend tax, as they are also subject to the 60% marginal rate when the personal allowance is eroded.
The Treasury estimates the measure will raise around £2.1bn. Unlike income tax changes, dividend rate increases fall mainly on shareholders and company owners rather than employees on PAYE.
Economic and behavioural effects
The effect of so many tax rises of the past decade will inevitably affect how directors draw down their profits.
In reality, successive hikes encourage:
- Retaining earnings within the company rather than drawing down profits;
- Making higher employer pension contributions;
- Revisiting salary-dividend splits; and
- Reassessing the long-term advantages of trading via a limited company.
On its own, a two-point rise may not look significant. But after years of lower allowances and higher Corporation Tax, it adds to the steady increase in the overall tax burden on company profits.
For directors and shareholders, what matters is how those layers of tax combine in practice, so it makes sense to review your position with your accountant rather than reacting to a single tax change in isolation.
