- Dividend income tax rate to rise by two percentage points from 6 April 2026 for most taxpayers
- The rates for basic rate taxpayers and higher rate taxpayers will increase to 10.75% and 35.75% respectively, with the top rate unchanged at 39.35%
- Taxpayers face an extra tax bill of £390 on £20,000 worth of dividends
- Dividend tax has changed seven times in 11 years
- Tips on how to beat the dividend tax hike…
- …including how diverting profits into a pension can save up to 50% in tax versus drawing dividends
Charlene Young, senior pensions and savings expert at AJ Bell, comments on the increases to dividend tax rates from April 2026 and explains how investors and company owners can save tax:
“Currently, people in the UK can earn up to £12,570 a year without paying tax. This personal allowance is used up by salary for most people, although you start to lose this allowance once you have total income above £100,000 thanks to the personal allowance taper that depletes your personal allowance by 50p for every £1 you earn.
“Dividend income outside of ISAs and pensions also benefits from an extra tax-free allowance but it is a pretty stingy £500, down from £2,000 as recently as 2023. Dividend income over the allowance is usually the top layer of income taxed at your marginal rate. The dividend tax rates currently start at 8.75% for basic rate taxpayers, 33.75% at the higher rate, and 39.35% at the additional rate.
“From 6 April 2026, basic and higher rate taxpayers face an extra tax bill of £390 on £20,000 worth of dividends compared to this year.
”Eleven years of dividend tax changes
“Before the first set of changes in 2016, basic rate taxpayers enjoyed zero tax on their dividend income, thanks to a notional 10% tax credit that matched their 10% tax rate. This credit was then removed to make way for a £5,000 tax-free dividend allowance, which meant many smaller investors were protected from tax. But that allowance has since been slashed by 90% and now stands at just £500.
“This double whammy of a shrinking allowance and rising tax rates has dragged millions more people into paying the tax for the first time. Figures from HMRC, obtained under an FOI from AJ Bell, found that 3.7 million people are expected to pay dividend tax this year, more than double the number from 2021/22. The tax changes from April next year are expected to add another £280 million for the next tax year and close to £1.4 billion a year by the end of the decade.
Over 3.7 million taxpayers are expected to incur tax on dividend income this year:
How dividend tax has changed over the years:
“To put it in context, a basic rate taxpayer with £10,000 of dividends a year would have paid no tax on dividends in 2015, but from 6 April they’ll be handing over £1,021 in tax on that income.
“Higher rate taxpayers have faced a bigger increase in their tax bills than additional rate taxpayers, thanks to the big hike in tax rates – their rate has gone from an effective rate of 25% in 2015 to 35.75% from next year. In comparison, additional-rate taxpayers have seen a rise from an effective rate of 30.56% in 2015 to 39.35% from 2022.
Source: AJ Bell. Based on £10,000 of dividends.
How to reduce your dividend tax bill
“Making the most of tax-wrapper allowances for ISAs and pensions will protect more of your wealth. Pensions come with added tax relief up front on what you pay in personally, but the money will be locked up until age 57 for most people. You can take tax-free withdrawals from a Stocks and Shares ISA at any age.
“The annual ISA allowance is currently £20,000, so you can potentially move £40,000 into your ISA before the latest tax hike starts to bite by using this year’s allowance now and next year’s as soon as the new tax year starts in April. You can do this using a transaction called ‘Bed and ISA.’
“If you have a spouse who also hasn’t used their ISA allowance this year and doesn’t have their own investments outside an ISA you can double this allowance and shift your portfolio away from tax more rapidly.
“It’s important to keep an eye on any capital gains you have stored up. Moving investments into ISAs might mean you crystallise these gains, using up your remaining capital gains tax-free allowance. You can transfer investment to your spouse on a ‘no gain, no loss’ basis before they are then sold to fund ISAs for the year and this will use your spouse's own capital gains allowance.”
How pension contributions reduce tax for limited company directors
“Rising dividend tax rates are also a blow for business owners. If you own your own limited company, making an employer pension contribution through your business is a very tax efficient way of extracting profits if you’re able to lock away the money for the long-term in a pension, and will save even more dividend tax for most people after 6 April.
“This is because pension contributions are deducted from your total profits and won’t therefore be liable to corporation tax. But it’s worth noting that employer contributions will count towards your own pension annual allowance.
“Unlike salary payments, employer pension contributions aren't liable for employer's National Insurance (of up to 15%) and you won’t be liable to income tax or National Insurance on the contribution as an employee.”
Case study - David
Here’s how the pension numbers stack up for David, a higher rate taxpayer who owns and manages a limited company. If he chose to contribute £30,000 of extra profits directly into his pension as an employer contribution, it could save over £15,000 in taxes compared to drawing it as a dividend.
Source: AJ Bell. Income tax applies on pension withdrawals. Companies with profits between £50,000 and £250,000 will pay tax at the main 25% rate, reduced by a marginal relief. *Assumes dividend tax rate rising to 35.75% after 6 April 2026. Current tax rate would mean net dividend of be £14,906.25.
