Dividend Tax Rates 2025/26 & 2026 Forecast
April 6, 2025 • 10 min read
Dividends remain the lifeblood of remuneration for Limited Company directors. Despite successive tax hikes, they remain more efficient than salary for extracting profits—but the gap is narrowing.
This guide covers everything from the frozen £500 Allowance to the 2026 Rate Hikes that every director needs to plan for right now.
What are Dividends?
Dividends are payments made to shareholders from post-tax profits.
- Post-Tax: This means Corporation Tax (19-25%) has already been paid on the money.
- No NICs: Dividends do NOT attract National Insurance (Employee or Employer). This is their superpower.
2025/26 Tax Rates (Current Year)
For the tax year running 6 April 2025 to 5 April 2026, the rates are:
| Band Name | Income Range (Total Income) | Dividend Tax Rate |
| :--- | :--- | :--- |
| Personal Allowance | £0 - £12,570 | 0% |
| Basic Rate | £12,571 - £50,270 | 8.75% |
| Higher Rate | £50,271 - £125,140 | 33.75% |
| Additional Rate | £125,140+ | 39.35% |
The Dividend Allowance (£500)
Regardless of your tax band, the first £500 of dividend income is tax-free.
- History: It used to be £5,000, then £2,000, then £1,000. Now it is a token £500.
- Usage: This allowance uses up your "Band" capacity. (e.g., if you earn £50,270 in total, and £500 is the allowance, that £500 still counts towards the £50,270 Basic Rate limit).
The Looming Threat: 2026/27 Rate Changes
The Autumn Budget confirmed substantial changes taking effect from 6 April 2026.
To align dividend taxation closer to employment income, rates are increasing by 2 percentage points.
| Band | 2025/26 Rate | 2026/27 Rate | Increase |
| :--- | :--- | :--- | :--- |
| Basic Rate | 8.75% | 10.75% | +2.0% |
| Higher Rate | 33.75% | 35.75% | +2.0% |
| Additional Rate | 39.35% | 39.35% | 0% |
Strategic Implication:
If you have "Retained Earnings" (profit sitting in your company bank account from previous years), it is highly advisable to declare and pay dividends before 5 April 2026 to lock in the lower rates.
- Example: On a £40,000 Higher Rate dividend, paying it in March 2026 vs May 2026 saves you £800 in tax.
Detailed Examples
1. The Basic Rate Director
- Salary: £12,570.
- Dividends: £37,700.
- Total Income: £50,270.
Calculation:
- Salary: £12,570 uses Personal Allowance. Tax £0.
- Dividend Allowance: First £500. Tax £0.
- Taxable Dividends: £37,200.
- Rate: All falls in Basic Band (£12,571 - £50,270). Rate 8.75%.
- Tax Bill: £37,200 * 8.75% = £3,255.
Note: In 2026/27, this same dividend will cost £3,999 (Rate 10.75%).
2. The Higher Rate Director
- Salary: £12,570.
- Dividends: £87,430.
- Total Income: £100,000.
Calculation:
- Basic Band Capacity: £37,700 (taxed as above). Tax: £3,255.
- Higher Band: The remaining £49,730 falls into Higher Rate.
- Rate: 33.75%.
- Higher Tax: £49,730 * 33.75% = £16,783.
- Total Tax: £20,038.
The "60% Trap" (Personal Allowance Taper)
When your Adjusted Net Income goes over £100,000, your Personal Allowance is reduced by £1 for every £2 over.
- This effectively adds 20% to your tax rate.
- Effective Dividend Rate between £100k - £125k: 33.75% + 20% = 53.75%.
Avoidance Strategy:
Make a Company Pension Contribution.
If you are at £110,000 income, putting £10,000 into a SIPP lowers your "Adjusted Net Income" back to £100,000, restoring your Personal Allowance and saving you a massive marginal tax bill.
Frequently Asked Questions
Do I pay tax on dividends if they stay in the company account?
No. You only pay Personal Tax when the dividend is "Paid" or "Made available" to you.
- However, simply transferring it to a Director's Loan Account (DLA) counts as being paid.
Do I need to pay the tax immediately?
No. Dividend tax is part of Self Assessment.
- Tax Year End: 5 April 2026.
- Payment Deadline: 31 January 2027.
- Warning: If your bill is over £1,000, you will trigger "Payments on Account" for the following year.
Can I pay dividends to my spouse?
Only if they own shares.
- "Alphabet Shares": Accountants often set up "A Shares" and "B Shares" to pay different dividends to different people.
- "Income Shifting": HMRC can challenge this if the spouse does not contribute to the business, though "Arctic Systems" case law generally protects spousal gifts of ordinary shares.
Summary
- 2025/26 Rate: 8.75% (Basic) / 33.75% (Higher).
- Allowance: £500.
- Strategy: Utilize the Basic Rate band fully (£50,270). Beware the £100k trap. Consider accelerating dividends before the 2026 Rate Rise.
Disclaimer: This guide is for 2025/26 rules. Ensure you check your exact numbers.