What the New Budget Means for Dividend Tax — and What It Means for You
The recent Budget announcements from the UK government bring a significant change for shareholders, small business owners and company directors who take income in the form of dividends. As accountants, we believe it’s vital you understand exactly what’s changing — and start thinking ahead.
What’s changing - Dividend tax rates are going up
Under the proposals, from 6 April 2026 the rates of tax on dividend income will rise by 2 percentage points for most taxpayers.
The “ordinary” dividend rate (for basic-rate taxpayers) will increase from 8.75 % to 10.75 %.
The upper rate (for higher-rate taxpayers) will rise from 33.75 % to 35.75 %.
The additional rate remains unchanged at 39.35 %.
The tax-free dividend allowance remains at £500.
Who’s hit hardest - and why this matters
This change particularly affects:
Company directors and owner-managers who use the common “low salary + dividends” model. Since dividends become more expensive, this may reduce the attractiveness of withdrawing profits via dividends.
Investors with significant shareholdings outside tax-sheltered wrappers such as ISAs or pensions.
Those relying on dividend income as part of their personal cash flow (e.g. shareholders living partially off dividends).
For example: a shareholder taking ~£40,000 in dividends a year could pay roughly £800 more in dividend tax after the increase comes into effect. And someone taking ~£90,000 in dividends might see the extra tax rise to ~£1,800 annually.
Moreover, for shareholder-employees of close companies, the increased dividend upper rate also raises the company’s potential tax liability under “loans to participators” rules — relevant if company loans or share buybacks are used.
What this means for planning and strategy
Given the changes, this may be a sensible time to review and adjust your remuneration and extraction strategies. Some considerations:
Review your extraction strategy — the old “low salary + high dividends” model may no longer deliver the same net benefit. It might be worth re-assessing whether a mix of salary, dividends, and pension contributions (or other tax-efficient mechanisms) produces a better outcome.
Use tax-efficient wrappers — dividends received via tax-sheltered vehicles such as ISAs or pensions remain unaffected.
Plan ahead for 2026/27 — the rate increases take effect from April 2026, so now is the time to model different scenarios (e.g., withdrawing profits before April or altering extraction levels).
Be mindful of corporate-level impacts, especially if using loans to participators or share buybacks. The cost of certain transactions may rise under the new dividend tax rules.
Why the government is doing this — and what to watch
The official rationale is that income from dividends (and savings/property income) has historically been taxed at lower rates relative to employment income — in part because dividends don’t pay National Insurance. The government argues that raising these rates helps address inequalities and balance tax contributions.
At the same time, the change compels many business owners and investors to think more carefully about their extraction and investment strategies. Planning — sooner rather than later — may help mitigate some of the downsides.
What to do next — Welf Accountants’ recommendations for clients
Run a review of your current remuneration structure (salary vs dividends vs pension / other withdrawals).
Model different extraction scenarios assuming the new dividend rates — including best-case / worst-case outcomes.
Explore tax-efficient alternatives, e.g. maximising pension contributions, using ISAs, considering salary restructuring.
Consider timing withdrawals — depending on your business’s cashflow and profit situation, it may make sense to pay dividends before April 2026.
Plan with long-term perspective — think about how this change interacts with other recent tax developments (e.g. savings and property income tax, frozen thresholds, inflation, fiscal drag).
In Summary
The upcoming dividend tax rise announced in the 2025 Budget represents a material shift for many shareholders, investors and owner-managed businesses. With dividend rates rising from April 2026, net returns from dividends will decrease — and the traditional “salary + dividends” tactic may no longer be as tax-efficient as before.
At Welf Accountants, we will be working with all our clients taking dividends as part of their income to review and re-assess their financial and extraction strategies, and we advise you to do the same, sooner rather than later. With careful planning, you can still optimise tax-efficiency and minimise the impact of these changes.
If you’d like a personalized review or help restructuring your remuneration strategy — just get in touch.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial or tax advice. Before making any investment decisions or relying on any of the information provided, you should seek professional advice tailored to your specific circumstances. Welf Accountants accepts no responsibility for any losses or liabilities arising from the use of this information. Correct as of date of publication.