Dividend Tax Rise 2026: What the New 10.75% and 35.75% Rates Mean

Quick answer

At the Autumn Budget 2025 the Chancellor raised the rates of tax on dividend income by 2 percentage points on the basic and higher rates. From the start of the 2026/27 tax year on 6 April 2026, dividends are taxed at:

• 10.75% if they fall in your basic-rate band (was 8.75%).
• 35.75% if they fall in your higher-rate band (was 33.75%).
• 39.35% if they fall in your additional-rate band (unchanged at the top).

The £500 dividend allowance survives, so the first £500 of dividends each year is still taxed at 0%. But everything above that allowance now costs more, and the people who feel it most are owner-directors of small limited companies and investors holding shares outside an ISA or pension.

This article explains exactly who is affected, walks through worked examples at the new rates, covers the knock-on effect on directors' loans, and sets out the practical ways to pay less.

What changed and why

Dividend tax has been ratcheting up for several years. The dividend allowance was £5,000 when it was introduced, fell to £2,000, then £1,000, and has sat at £500 since 2024/25. Alongside that shrinking allowance, the rates themselves have been pushed up.

The Autumn Budget 2025 added the latest 2-point rise on the basic and higher bands. The government's rationale is the long-standing gap between how earned income and dividend income are taxed: dividends do not attract National Insurance, so they have always been a cheaper way to extract money from a company or to receive investment income. Narrowing that gap raises revenue and reduces the incentive to incorporate purely for tax reasons.

The structure of dividend taxation is unchanged — only the rates moved:

• Dividends are treated as the top slice of your income, taxed after your salary, pension and savings income.
• The £500 allowance uses up part of whichever band the dividends fall into; it does not give you an extra £500 of tax-free space on top.
• The band your dividends fall into is determined by your total income, so a modest salary plus a large dividend can push some of the dividend into the higher-rate band.

The 2026/27 dividend tax rates in full

The Personal Allowance remains frozen at £12,570 and the higher-rate threshold at £50,270. Because dividends sit on top of your other income, the order in which income is taxed matters — work it through with the

.

Who is affected

Company directors

The classic small-company strategy is a salary at or just above the National Insurance threshold, with the rest of the profit taken as dividends. That structure is still tax-efficient compared with a full salary, but the gap has narrowed. A higher-rate director taking a large dividend now pays 35.75% on the bulk of it, up from 33.75%.

Investors holding shares outside an ISA

Anyone with a general investment account — shares, investment trusts, equity funds paying distributions — pays the new rates on dividends above £500. With the allowance at just £500, even a modest portfolio of £15,000–£20,000 yielding 3-4% will breach it.

Who is not affected

• ISA holders — dividends inside a Stocks and Shares ISA are entirely tax-free, full stop.
• Pension investors — dividends inside a SIPP or workplace pension are free of dividend tax.
• Anyone with under £500 of dividends a year outside a wrapper — still covered by the allowance.

Worked example: a higher-rate investor

Sarah has a £60,000 salary and a general investment account paying £8,000 of dividends a year.

• Her salary uses up her Personal Allowance and pushes her into the higher-rate band, so all her dividends sit in the higher band.
• The first £500 is covered by the dividend allowance → 0%.
• The remaining £7,500 is taxed at 35.75% = £2,681.25.

Under the old 33.75% rate she would have paid £2,531.25 — so the rise costs her £150 this year on this portfolio. Scale that to a larger holding and the numbers grow quickly. If Sarah moved as much of the portfolio as possible into her ISA over the coming years, those dividends would become tax-free.

Worked example: a company director

Raj runs a limited company and takes a £12,570 salary plus £40,000 of dividends, total income £52,570.

• Salary £12,570 covers his Personal Allowance.
• Dividends stack on top. The slice from £12,570 to £50,270 (£37,700) sits in the basic band at 10.75%; the slice from £50,270 to £52,570 (£2,300) sits in the higher band at 35.75%.
• The £500 allowance covers the first £500 of the basic-band slice.
• Basic-band dividend tax: (£37,700 − £500) × 10.75% = £3,999.
• Higher-band dividend tax: £2,300 × 35.75% = £822.25.
• Total dividend tax ≈ £4,821.

Under the previous rates the same dividends would have cost about £4,512, so the rise adds roughly £309 to Raj's personal tax bill. Compare the salary-versus-dividend mix at the new rates with the

.

The directors' loan knock-on: S455 at 35.75%

There is an important second change for directors. When a director's loan account is overdrawn — the director owes money to the company — and the loan is not repaid within nine months and one day of the company year end, the company must pay a temporary tax charge called S455. That charge is deliberately set to mirror the higher dividend rate, so it has risen in step to 35.75% for 2026/27.

In practice this means an overdrawn loan of £30,000 left unpaid past the deadline triggers a company tax charge of £30,000 × 35.75% = £10,725. The charge is refundable once the loan is repaid, but HMRC holds the money in the meantime, so directors should clear overdrawn loans before the deadline or treat them as dividends and budget for the higher personal rate. There is also a benefit-in-kind charge if the loan exceeds £10,000 at any point and no commercial interest is paid.

How the dividend tax stacks on top of salary

A point that catches people out: dividends do not have their own separate bands. They are added on top of everything else, so two people with identical dividends can pay very different amounts depending on their other income.

• Someone with no other income can receive a substantial dividend largely within the basic band at 10.75%.
• Someone already earning £50,270 from a salary pays 35.75% on every pound of dividend above the £500 allowance, because the dividends sit entirely in the higher band.

This is why income planning across a household matters so much, and why the spouse split below is so powerful.

Mitigation 1: use your ISA

The single most effective shelter is the Stocks and Shares ISA. Every adult has a £20,000 ISA allowance for 2026/27, and dividends inside an ISA are completely free of dividend tax — there is nothing to report and nothing to pay.

If you hold dividend-paying investments in a general account, moving them into an ISA over successive tax years (a strategy known as "Bed and ISA") progressively removes them from the tax net. A couple can shelter £40,000 a year between them. Model the long-term tax-free growth with the

.

Mitigation 2: pension contributions

A personal or workplace pension contribution extends your basic-rate band by the gross amount contributed. That can push some of your dividend income out of the 35.75% higher band and down into the 10.75% basic band.

For example, a £5,000 gross pension contribution widens the band by £5,000, so £5,000 of dividends that would have been taxed at 35.75% are instead taxed at 10.75% — a saving of 25 percentage points on that slice, on top of the income-tax relief on the contribution itself. Dividends held inside the pension are also free of dividend tax going forward. See the

and our guide on pension tax relief.

Mitigation 3: split investments with a spouse

Spouses and civil partners can transfer assets between themselves with no capital gains tax. That opens up two valuable levers:

• Two dividend allowances — £500 each, so £1,000 of dividends tax-free across the couple.
• Two sets of bands — moving income-producing shares to the lower-earning partner can mean dividends taxed at 10.75% instead of 35.75%, or even covered by an unused Personal Allowance.

If one partner is a non-earner or basic-rate taxpayer, shifting the dividend-paying portfolio (or part of it) into their name can roughly halve the effective rate. The transfer must be a genuine, outright gift, not a paper arrangement.

Mitigation 4: for directors, revisit the salary/dividend mix

The rise narrows — but does not close — the gap between salary and dividends. Dividends still escape National Insurance, so for most owner-directors a modest salary plus dividends remains more efficient than an all-salary approach. But the optimal salary level, the value of a slightly higher salary to bank an extra year of corporation-tax-deductible pay, and the case for routing profit into a pension instead of dividends all deserve a fresh look at the new rates. The

lets you test combinations side by side.

What has not changed

It is worth being clear about what stayed the same, to avoid double-counting the bad news:

• The £500 dividend allowance is unchanged.
• The additional rate of 39.35% is unchanged — only the basic and higher rates rose.
• ISAs and pensions remain fully sheltered.
• The order of taxation (dividends as the top slice) is unchanged.
• Corporation tax is unchanged at 19% for small profits and 25% at the main rate, with marginal relief between £50,000 and £250,000.

Action checklist for 2026/27

1. Work out your dividend income for the year and which band it falls into using the
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2. Fill your ISA before 5 April 2027 to make future dividends tax-free.
3. Consider a pension contribution to widen your basic-rate band and shelter future dividends.
4. Review joint holdings with a spouse to use two allowances and two sets of bands.
5. If you are a director, clear any overdrawn loan before the nine-month deadline to avoid the 35.75% S455 charge, and re-test your salary/dividend split.

The dividend tax rise is modest in percentage terms but cumulative — it follows years of a shrinking allowance and earlier rate rises. The defence is the same as it has always been: get as much of your dividend income as possible inside an ISA or pension, where it is taxed at nothing at all.

This article is general information, not financial advice. Figures use 2026/27 UK rates announced at the Autumn Budget 2025. Dividend and company tax planning is complex — consider regulated advice for significant amounts or director remuneration decisions.