Dividend Tax Increases: UK Budget Changes & How to Act Before April 2026
From April 2026, the UK government will increase dividend tax rates. The basic rate rises from 8.75% to 10.75%, the higher rate rises from 33.75% to 35.75%, and the additional rate remains at 39.35%. The annual dividend allowance remains at £500 for 2026/27.
These changes only affect dividends outside tax-protected exempt accounts such as ISAs or pensions. Dividends held within these continue to be fully tax-free, allowing investors to grow their savings without additional liability.
Why the government is increasing Dividend Taxes?
The government’s objective is to create a fairer system between income from work, which is subject to National Insurance, and income from investments, which historically has been taxed less. Previously, dividends, savings, and property income had preferential treatment, creating advantages for asset holders over those relying on earned income.
By increasing dividend tax rates, the government aims to reduce incentives to take income as dividends instead of salaries and to increase revenue from higher-income individuals. Read our 2025 Budget guide for further information.
What to do ahead of the dividend tax rise?
Those receiving dividends outside of ISAs or pensions may benefit from taking dividends before the new rates take effect on 6 April 2026. Since both basic and higher dividend rates rise by two percentage points, dividends declared before this date are taxed at the current lower rates.
The advantage depends on total annual income. Dividends within the £500 allowance still count toward higher-rate thresholds, meaning additional dividends could enter a higher tax band.
For modest dividend earners, the increase is small; for instance, £10,000 in dividends outside an ISA could face approximately £190 more tax under the new rates.
Other related tax changes affecting savers and investors
The 2025 Budget also introduced tax changes for savings and property income. From April 2027, interest and rental income tax rates rise by two percentage points across all bands: 22% for basic, 42% for higher, and 47% for additional.
Additionally, personal allowances and thresholds are frozen until 2031, creating “fiscal drag.” Inflation and wage growth may gradually push taxpayers into higher bands even without changes in rates. These measures mean that passive income, such as dividends, savings, and property income, will face higher taxation.
Dividend tax increases: practical tax planning tips
- Accelerate dividend distributions: Business owners or shareholders may reduce tax liability by taking dividends before April 2026.
- Use tax-efficient structures: Maximise ISAs and pensions, as dividends inside these accounts remain tax-free. See HMRC ISA guidance.
- Review your income mix: Balancing salary, dividends, savings, and rental income can minimise total tax exposure.
- Plan ahead for savings and property income: Timing interest payments, using ISAs, and evaluating rental yields can reduce tax liabilities.
Key Takeaways
The 2025 Budget continues the trend of taxing asset-derived income more heavily, narrowing the advantage of passive income over salary. Dividend tax rises from April 2026, alongside planned increases for savings and property income, underscore the importance of careful planning.
Investors and business owners have a limited window to benefit from current rates. Using ISAs or pensions and reviewing income strategies will help mitigate the impact of these changes effectively.
Contact Alexander & Co
If you need advice on any of the measures covered in this update, or support with wider tax or business matters, please contact Alexander & Co. You can complete the contact form on this page, or in the following ways:
Phone: 0161 832 4841 or 0207 1670 7220
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Website: www.alexander.co.uk
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