Dividend tax changes: what you need to know
The Autumn Budget 2025 introduced significant changes to the way dividends are taxed in the UK. These changes will affect company directors, investors, and anyone receiving dividend income outside tax-free wrappers such as ISAs or pensions.
Key changes announced
- Dividend tax rates increasing
From April 2026, the rates of tax on dividend income will rise by 2 percentage points:- Basic rate: Increasing from 8.75% to 10.75%
- Higher rate: Increasing from 33.75% to 35.75%
- Additional rate: Remains at 39.35%
Dividend allowance remains unchanged
The Dividend Allowance will stay at £500 for the 2025/26 tax year. This means the first £500 of dividend income remains tax-free, but anything above this will be taxed at the new rates from April 2026.
Most business owners hit – but not those with very high income
Because the additional rate is not changing, and dividend income is treated as the “top slice” of income for tax purposes, these amendments will only impact individuals who have less than £125,000 of other income (such as employment, savings, or rental income). Those with other income above £125,000 will be paying the additional rate and will see no change in their dividend tax liability.
Our recommendation
Our calculations indicate that when dividends can be paid it will still be optimal to take a salary up to the personal allowance (£12,570) and then take dividends on top of this amount. This approach remains the most tax-efficient strategy for most owner-managed businesses.
Impact on charities and social enterprises
Charities, social enterprises, companies limited by guarantee cannot pay dividends. The same applies to some businesses for example, due to share structure or lack of accumulated reserves. Any entity that cannot pay dividends to the owner managers are unaffected by these changes.
Therefore these measures go some way to levelling the playing field, as the tax and National Insurance cost for these organisations is not changing, whereas most business owners will face an additional 2% dividend tax. However, there is still a differential slightly favouring those who can pay dividends.