How the new 2026 Dividend Tax rates could affect you

On 6 April, the Dividend Tax rate for basic and higher rate taxpayers increased by two percentage points.

It’s important to understand what this means if you:

• pay basic or higher rate Income Tax; and
• receive dividend income, either from dividend-paying shares or a business you own or have shares in. 

Find out what’s changed and how it could affect you and your money.

What are dividends?

Dividends are a portion of a company’s profits that are paid out to its shareholders. They can be paid in the form of cash or as more dividends. The rate you receive is set per share, and you then receive that amount per share you hold.

Anyone who holds shares in a company is a ‘shareholder’. So, for example, if you buy shares in a company through a General Investment Account, you’re a shareholder of that business.

If it chooses to pay a dividend, you’ll be entitled to that payment per share that you hold.

Likewise, if you’re a director of a limited company, you’re a shareholder of the business. In that case, you can choose to pay yourself dividends for each share. 

You’ll also have to pay the same amount to anyone who owns equivalent shares, such as a spouse or co-owner.

Note that companies can suspend their dividend payments. They might do this in circumstances such as if profits are lower than expected. 

Dividend Tax rates increased in April 2026

Dividend Tax is a form of Income Tax charged specifically on dividends. Your dividends are added to your taxable income, as the ‘top slice’ of it.

So, when working out your tax bill, you go in order from top to bottom of:

• non-savings income, such as from your salary;
• savings income, such as on taxable interest; and finally
• dividends.

Before you pay Dividend Tax on this top slice, you have a tax-free Dividend Allowance. In 2026/27, this is £500.

You’ll then pay tax on dividends above those allowances, with the rate depending on which tax band they fall into.

Crucially, these tax rates increased by two percentage points when the new tax year started on 6 April. 

The table below shows the Dividend Tax rates from last tax year (2025/26), and what they are for 2026/27:

Note that the Dividend Tax rates are lower than the Income Tax rates in the same band, as shown in the table below:

So, dividends may push you into a higher tax bracket. But it can still be more tax-efficient to have them as part of your income than just your salary.

How Dividend Tax works in practice 

Let’s look at an example to help you see how Dividend Tax works within these tax bands alongside your other income.

Imagine that you earn £45,000 as your salary. You have no other income except £10,000 in dividends.

In this case, here’s how the tax could work:

• your £45,000 salary falls in the basic rate band, with the first £12,570 being tax-free under your tax-free Personal Allowance;
• your £10,000 of dividends are then added to your total income;
• the first £5,270 falls in the basic rate tax band; 
• of this, the first £500 is tax-free, with the next £4,770 taxed at 10.75%; and
• the final £4,730 is in the higher rate band, taxed at 35.75%.

Note that this is an example. Your personal tax arrangements may differ and you could pay more or less tax depending on your circumstances.

How the new Dividend Tax rates could affect you

Dividend Tax could affect your money if you: 

• own dividend-paying shares; or
• pay yourself from a business using dividends.

Any dividends above your Dividend Allowance (or any Personal Allowance you have left, if relevant) may be taxable. That extra 2% on the tax rate could make a dent on your returns.

Using the example above of £10,000 in dividends, you’d have faced £2,013.75 of tax in 2025/26. In 2026/27, you’d pay £2,203.75 - that’s almost an extra £200.

Fortunately, there are a couple of ways to mitigate this charge.

Invest through a Stocks and Shares ISA

Any returns in an ISA are entirely free from Income Tax, Capital Gains Tax (CGT) and Dividend Tax. So, you could hold your dividend-paying investments in a Stocks and Shares ISA. 

You can contribute up to £20,000 to an ISA each tax year (2026/27). Making the most of that allowance could help you make your investments more tax-efficient and keep hold of more of your returns.

Tactically draw income from a business

If you’re a business owner, paying yourself a salary and dividends from your business with allowances and thresholds in mind could help you cut your tax bill.

Make full use of your pension

Your pension savings will be invested, giving your money the potential to grow. Any growth your investments generate is free from tax. So, any dividends they receive will be tax-free. 

Each tax year, you can make contributions up to the annual allowance, the limit on the gross amount that can be saved into a pension each tax year without incurring tax charges. This is £60,000 in 2026/27, and includes personal, third party, and employer contributions. 

There’s a separate limit on tax relief. You can receive tax relief on personal and third-party contributions (excluding employer contributions) up to 100% of your ‘relevant earnings’, capped at £60,000 per year (2026/27). 

Plus, if you’re a company director, you can make employer contributions to your fund. This can be a highly tax-efficient way to extract money from your company as these may be considered an ‘allowable business expense’. That might mean you can cut your Corporation Tax bill too.

{{main-cta}}

Save for retirement with PensionBee

Whatever your employment status, you can save for retirement with PensionBee.

Combine existing pensions into one plan and contribute flexibly, whether that’s regular payments or one-off lump sums.

You can also open a PensionBee pension if you’re self-employed. Sole traders can flexibly make personal contributions. Meanwhile, limited company directors can also contribute as an employer, which could offer more tax benefits.

Visit our website to find out how it works and sign up today.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Please note that tax rules change regularly, and the actual tax benefits you receive will depend on your individual circumstances. If you’re not sure, please seek professional advice.