As announced at the time of the 2025 Autumn Budget, the ordinary and upper dividend tax rates are increased by two percentage points from 6 April 2026. The additional dividend rate remains unchanged. The increase will affect those with shareholdings who receive dividend income, as well as shareholders in personal and family companies who extract profits through dividends.

All taxpayers, regardless of the rate at which they pay tax, receive a dividend allowance. This is set at £500 for 2026/27, unchanged from the previous year. The dividend allowance acts as a nil rate band, and dividends sheltered by the allowance are received free of tax. However, the allowance uses up part of the tax band it falls into. 

Where the dividend allowance does not shelter dividends, they are treated as the top slice of income and taxed at the dividend tax rates. The ordinary rate of dividend applies to dividends falling within the basic rate band and is set at 10.75% for 2026/27 (up from 8.75% for 2025/26). Dividends falling in the higher-rate band are taxed at the upper dividend rate, which is set at 35.75% for 2026/27 (up from 33.75% for 2025/26). Where dividends fall in the additional rate band, they are taxed at the dividend additional rate, which remains at 39.35% for 2026/27.

The tax rises mean that taxpayers paying tax on their dividends at the ordinary or upper dividend rates will pay an additional £20 in tax for every £1,000 of dividend income in 2026/27.

Example

John is retired. He receives a pension of £20,000 each year. He has invested in shares over the years and receives £30,000 in dividends a year, which boosts his retirement income.

For 2026/27, he will pay tax of £3,171.25 on his dividend income. The first £500 of dividends is tax-free, sheltered by the £500 dividend allowance. The remaining £29,500 is taxed at the dividend ordinary rate of 10.75%. After tax, John retains £26,828.75.

In 2025/26, he also received dividend income of £30,000. However, his tax bill for that year was £2,581.25, leaving John with £27,418.75 after tax.

As a result of the rise in the dividend ordinary rate, John is £590 worse off in 2026/27 (£29,500 @ 2%).

Impact on profit extraction

For directors of personal and family companies, a popular profit-extraction strategy is to take a salary equal to the personal allowance and extract additional profits as dividends. Where the dividends are taxed at the ordinary or upper dividend rates, the director/shareholder will pay more tax on those dividends than in 2025/26.