Dividend Tax Rates are Changing
The government announced a number of changes to tax legislation in their Autum Budget in November 2025. One of the key changes for owner-managed business was the confirmation that dividend tax rates will increase from April 2026, with the ordinary and upper rates of dividend tax rising by 2%.
For many small and medium-sized companies, dividends are central to how owners pay themselves. With the dividend tax rates rising, consideration will need to be given to profit extraction strategies.
What’s Actually Changing
From April 2026:
- The dividend ordinary tax rate increases from 8.75% to 10.75%
- The dividend upper tax rate rises from 33.75% to 35.75%
- The dividend additional tax rate remains at 39.35%
- The tax-free dividend allowance remains at £500
The rate of tax that you pay on your dividend income will depend upon the amount of your total income and the various sources of your income.
For a full breakdown of all 2026/27 tax rates and thresholds, you can download our Tax Rates PDF here.
How Will This Impact Owner-Managed Businesses
Historically, it has been standard practice for Owner managers to remunerate themselves with a mix of low salary and high dividends, as this has represented the most beneficial remuneration strategy.
With the number of changes that have been made to dividend tax rates, going all the way back to the abolition of the notional dividend tax credit in April 2016 through to this latest change, each individual will need to assess their position and ensure that they are remunerating themselves as tax efficiently as possible.
The best profit extraction strategy for one director may look quite different for another, especially when factors like income levels, other earnings, the availability of the NIC employment allowance, pensions and Company profits are taken into account.
Owner managers should be reviewing the following:
- Whether a different mix of salary and dividends is now more efficient for you
- Whether to accelerate dividend declarations before 6 April 2026
- The impact on cash flow if you switch to taking a larger salary instead of dividends
If you would like to discuss the impact of the above noted change in tax legislation, please do not hesitate to contact us at Harling and Kirk Accountants.
Email: office@harlingkirkaccountants.co.uk
Telephone: 01494 306 002