Contents
- Introduction
- Key Takeaways
- What is changing with dividend tax in April 2026?
- Should directors accelerate dividends before April 2026?
- Using allowances and ISAs to reduce dividend tax
- Practical steps before 5 April 2026
- Summary
- FAQs
Introduction
With the end of the tax year approaching, many company directors and shareholders are reviewing how they extract profits from their businesses. One issue that has become particularly relevant is the dividend tax increase that will take effect from 6 April 2026.
Dividends are a common way for directors of small companies to take income because they are typically taxed at lower rates than salary and are not subject to National Insurance. However, the government confirmed that dividend tax rates for basic-rate and higher-rate taxpayers will increase by two percentage points from the start of the 2026/27 tax year.
Although the change may appear small, it can still make a noticeable difference for directors who regularly receive dividends. As a result, many business owners are asking whether it makes sense to accelerate dividends before April 2026 in order to reduce their tax bill.
In some situations bringing dividends forward can reduce the amount of tax paid. However, the right approach depends on your personal income, your tax band and your wider financial planning.
Key Takeaways
- Dividend tax rates for basic-rate and higher-rate taxpayers will increase from 6 April 2026
- The dividend allowance remains £500 per person
- Taking dividends before 5 April 2026 may reduce the tax payable
- Accelerating dividends may not be beneficial if it pushes income into a higher tax band
- Using tax-efficient investment accounts such as ISAs can help reduce dividend tax over time
What is changing with dividend tax in April 2026?
Dividend income is taxed depending on which income tax band it falls into.
For the 2025/26 tax year the dividend tax rates are:
- Basic rate: 8.75 percent
- Higher rate: 33.75 percent
- Additional rate: 39.35 percent
From 6 April 2026 the rates will increase for basic and higher-rate taxpayers:
- Basic rate: 10.75 percent
- Higher rate: 35.75 percent
- Additional rate: 39.35 percent
The dividend allowance remains £500. This means the first £500 of dividend income received in a tax year is tax free, although it still counts towards your income tax band.
While the increase is only two percentage points, the additional tax can still add up. For example, a basic-rate taxpayer receiving £1,000 in dividends currently pays around £44 in tax. After April 2026 that would rise to roughly £54.
For a higher-rate taxpayer receiving £2,000 in dividends, the tax currently comes to around £506 and would increase to about £536 once the new rates apply.
For larger dividend withdrawals the difference becomes more noticeable. A higher-rate taxpayer taking £50,000 in dividends could pay roughly £1,000 more tax simply due to the rate increase.
Should directors accelerate dividends before April 2026?
Because the tax increase takes effect from 6 April 2026, the current tax year represents the final opportunity to receive dividends at the existing lower rates.
This is why many directors are considering whether to bring dividend payments forward before the end of the tax year. The logic is straightforward. If you already expect to withdraw profits from your company within the next year or two, taking the dividend earlier may allow you to benefit from the current tax rates.
For example, a higher-rate taxpayer extracting £50,000 in dividends would currently pay £16,875 in dividend tax at the 33.75 percent rate. After the tax increase the same dividend would be taxed at 35.75 percent, increasing the tax bill to £17,875. That represents £1,000 more tax without any change in income.
However, accelerating dividends does not always produce a tax saving. The strategy only works when the dividends remain within your current tax band.
If bringing dividends forward pushes your income into a higher tax band, the tax rate applied could increase significantly. For instance, a dividend taxed at 8.75 percent within the basic-rate band could instead be taxed at 33.75 percent if it moves into the higher-rate band. In that situation it may actually be cheaper to wait until the following tax year and pay the new 10.75 percent rate.
There are also other factors to consider. Higher income levels can trigger the tapering of the personal allowance for some taxpayers and may interfere with other financial planning strategies such as pension contributions. In some cases the company itself may need to retain profits for stability or investment.
For these reasons it is often helpful to review income across both the current and the next tax year before deciding whether to accelerate dividends.
Using allowances and ISAs to reduce dividend tax
Before considering larger dividend payments, it is worth checking whether available allowances have been fully used.
For the 2025/26 tax year individuals still have access to the £500 dividend allowance and may also have unused personal allowance available. Using these allowances before the end of the tax year can allow profits to be extracted without triggering additional tax.
In family companies where several shareholders are involved, dividend planning can also help ensure that allowances and lower tax bands are used efficiently. This can involve distributing dividends in a way that allows each shareholder to use their available allowances before higher tax rates apply.
Another way to reduce the long-term impact of dividend tax is by investing through tax-efficient accounts such as an Individual Savings Account. Investments held inside an ISA benefit from tax free dividend income and no capital gains tax on investment growth.
Each individual can invest up to £20,000 per year across their ISAs and the allowance resets every tax year. Because unused ISA allowance cannot be carried forward, making full use of it each year can make a significant difference over time.
Some investors who hold shares outside an ISA also use a strategy known as bed and ISA. This involves selling investments held in a general investment account and repurchasing them within an ISA. Although capital gains tax may apply when selling the investments, once they are inside the ISA wrapper future dividends and gains are protected from tax. Over time this allows investment returns to compound without being reduced by tax.
Practical steps before 5 April 2026
If you are considering accelerating dividends before the tax year ends, it helps to review your position carefully.
Start by looking at your expected income for both the current tax year and the next one. This helps you understand which tax band your dividends will fall into and whether bringing income forward could push you into a higher rate of tax.
It is also important to confirm that the company has sufficient retained profits available for distribution, since dividends can only be paid from distributable reserves.
Some practical checks that can help guide the decision include:
- Reviewing your total income for 2025/26 and estimating your income for 2026/27
- Identifying how much room remains within your current tax band
- Confirming that the company has sufficient retained profits available
- Checking whether the £500 dividend allowance has been used
- Considering whether funds could be used for ISA contributions or pension planning
- Ensuring dividend payments are supported by board minutes and dividend vouchers
- Reporting dividend income correctly in your Self Assessment
Taking a structured look at these areas can help you decide whether accelerating dividends genuinely improves your tax position.
Summary
The dividend tax increase taking effect on 6 April 2026 will raise the tax paid on dividend income for basic-rate and higher-rate taxpayers.
For some company directors and shareholders, taking dividends before the end of the 2025/26 tax year could reduce the tax payable. However, accelerating dividends is not always the best strategy.
The most tax-efficient approach depends on your income level, your tax band and your longer-term financial plans. Reviewing your position before the tax year ends can help ensure profits are extracted from your company in the most efficient way.
FAQs
What is the dividend tax increase in April 2026?
From 6 April 2026 the dividend tax rate for basic-rate taxpayers will increase from 8.75 percent to 10.75 percent. The higher-rate dividend tax will increase from 33.75 percent to 35.75 percent.
What is the dividend allowance?
The dividend allowance is £500 per person. The first £500 of dividend income received in a tax year is tax free.
How much more tax will I pay after April 2026?
Basic-rate and higher-rate taxpayers will pay around £20 more tax for every £1,000 of dividends received after the rate increase.
Can dividends be paid at any time?
Dividends can only be paid when a company has sufficient retained profits and the payment must be properly declared and documented.
Should directors take dividends early?
Taking dividends before April 2026 may reduce tax in some cases, but it depends on your income and tax band. Reviewing both the current and next tax year is usually the best approach.
