Dividend Tax Changes from April 2026: Profit Extraction Planning for Company Owners

For many years, operating through a personal or family company and extracting profits as dividends was one of the most tax-efficient ways for business owners to take money out of their company. While that approach can still make sense, the tax landscape for dividends has changed significantly over time and continues to tighten.

Following further announcements in the Autumn Budget 2025, dividend tax rates will rise again from 6 April 2026, increasing the cost of profit extraction for many director-shareholders. This article explains how dividend taxation has evolved, how dividends are currently taxed, and what business owners may want to consider before the next rate increase takes effect.

How dividend taxation has changed over time

The pre-2016 position

Before 6 April 2016, dividends came with a 10% tax credit. For basic-rate taxpayers, this effectively meant that dividend income could be received tax-free, provided total income did not push the individual into higher or additional rate tax.

As a result, dividends were widely used as a low-tax method of profit extraction once the personal allowance had been used.

Changes from April 2016

From 6 April 2016, the dividend tax regime was fundamentally restructured:

• the dividend tax credit was abolished, and
• a new dividend allowance was introduced.

In 2016/17, the dividend allowance was set at £5,000, allowing that amount of dividend income to be taxed at 0%. However, any dividends above the allowance became taxable even for basic-rate taxpayers.

Dividend tax rates were set at:

• 7.5% (basic rate band),
• 32.5% (higher rate band), and
• 38.1% (additional rate band).

Progressive tightening of the rules

Since 2016, dividend income has been subject to repeated restrictions:

• the dividend allowance was reduced to £2,000 from April 2019,
• reduced again to £1,000 from April 2023, and
• cut further to £500 from April 2024, where it now remains.

Dividend tax rates were also increased by 1.25% as part of the short-lived Health and Social Care Levy changes. Although the associated National Insurance increases were later reversed, the higher dividend tax rates were retained.

At the same time, corporation tax rates increased from April 2023, with profits above £50,000 subject to higher effective rates, reducing the amount of post-tax profit available for distribution.

Further dividend tax increases from April 2026

The squeeze on dividend income continues.

In the Autumn Budget 2025, the Chancellor announced that:

• the dividend ordinary rate, and
• the dividend upper rate

will both increase by two percentage points from 6 April 2026.

Under the new rates:

• the dividend ordinary rate will rise from 8.75% to 10.75%, and
• the dividend upper rate will rise from 33.75% to 35.75%.

The dividend additional rate remains unchanged at 39.35%.

This means that director-shareholders whose dividends fall in the basic or higher rate bands will see a clear increase in their personal tax bills, even if their income does not change.

Using dividends to extract profits

Where a business is operated through a personal or family company, profits must be extracted to fund personal expenditure such as living costs.

A commonly used structure is:

• paying a salary up to the personal allowance, and
• extracting further profits as dividends.

Although employer’s National Insurance contributions (NICs) arise once salary exceeds the secondary threshold (currently £5,000) and the employment allowance is not available (as is often the case for personal companies), the salary cost is deductible for corporation tax purposes. This usually makes the approach commercially sensible.

Key rules when paying dividends

Several important points must always be borne in mind:

Dividends must come from profits

Dividends can only be paid out of distributable reserves. If sufficient retained profits do not exist, a dividend cannot lawfully be declared.

Dividends follow shareholdings

Dividends must be paid in proportion to shareholdings within the same class of shares. For example, a shareholder holding 20% of ordinary shares must receive 20% of any ordinary dividend.

This restriction can be managed through an alphabet share structure, where different classes of shares (A, B, C, etc.) allow dividends to be tailored to individual shareholders’ circumstances.

The dividend allowance and tax bands

Each individual receives a dividend allowance of £500 for 2025/26, which is set to remain at that level for 2026/27. The allowance operates as a nil-rate band, rather than an additional exemption.

Dividends are treated as the top slice of income. Once the personal allowance is used, dividend income is taxed as follows:

• at the dividend ordinary rate where it falls in the basic rate band,
• at the dividend upper rate where it falls in the higher rate band, and
• at the dividend additional rate where it falls in the additional rate band.

Dividend tax rates: before and after April 2026

2025/26 dividend tax rates

• Dividend allowance: £500 @ 0%
• Ordinary rate: 8.75%
• Upper rate: 33.75%
• Additional rate: 39.35%

From 6 April 2026

• Dividend allowance: £500 @ 0%
• Ordinary rate: 10.75%
• Upper rate: 35.75%
• Additional rate: 39.35% (unchanged)

Example: the cost of the rate increase

Ben runs a personal company and pays himself a salary of £12,570. Employer’s NICs of £1,135.50 arise. After deducting salary, NICs and other expenses, the company has £50,000 of taxable profits.

Corporation tax at 19% is £9,500, leaving £40,500 available for dividends.

Dividend tax in 2025/26

• First £500 @ 0%: £0
• £37,200 @ 8.75%: £3,255
• £2,800 @ 33.75%: £945

Total dividend tax: £4,200

Dividend tax in 2026/27 (same income)

• First £500 @ 0%: £0
• £37,200 @ 10.75%: £3,999
• £2,800 @ 35.75%: £1,001

Total dividend tax: £5,000

Ben pays £800 more in tax, despite no change in profits or dividend income.

Planning ahead: mitigating the impact

Accelerating dividends

Where a company has retained profits, paying dividends before 6 April 2026 may reduce the tax payable. This can be particularly effective where shareholders have unused basic rate bands or dividend allowances.

However, dividends should not be accelerated where doing so would push income into a higher tax band.

Family company planning

In family companies, dividends can be paid before April 2026 to utilise multiple shareholders’ allowances and basic rate bands. Alphabet share structures can be especially useful in targeting dividends efficiently.

Alternative extraction methods

Where profits are not immediately required personally, alternative strategies may be preferable, including:

• employer pension contributions, which are usually deductible for the company and tax-free for the individual at the time of contribution, and
• tax-exempt benefits, where these align with personal needs.

These methods can defer or reduce personal tax while still extracting value from the company.

Practical takeaway

Dividends remain a key profit extraction tool, but they are no longer the low-tax solution they once were. With dividend tax rates rising again from April 2026, early planning is essential to avoid unnecessary tax costs and to ensure profits are extracted in the most efficient way.

How we can help

If you run a personal or family company and rely on dividends for income, we can help you review your profit extraction strategy in light of the upcoming dividend tax changes. We can assess whether dividends should be accelerated, explore alternative extraction methods, and ensure your approach remains both tax-efficient and compliant. Please contact us to discuss your circumstances.