What’s Changing with Dividend Income Tax
In the UK Budget 2025, the government announced that dividend income tax rates will rise from 6 April 2026 for basic and higher rate taxpayers:
- Basic rate holders: from 8.75% to 10.75%
- Higher rate holders: from 33.75% to 35.75%
Additional rate stays at 39.35%. These rates apply to dividends above the annual dividend allowance. (gov.uk)
Other changes include adjustments to savings and property income thresholds and rates—but these will take effect from 6 April 2027. So for now, focus particularly on dividends. (gov.uk)
Who Is Affected
- Investors who own shares outside ISAs and whose dividend income exceeds the dividend allowance.
- Those with significant dividend portfolios who currently benefit from the lower basic or higher rate dividend rates.
- Non-UK residents may also be impacted, depending on treaty positions and whether their income is taxed through UK self-assessment.
Strategies to Mitigate Impact
- Maximise ISA usage: Dividends earned inside ISAs remain tax-free—if you can shift more investing into ISAs, that helps.
- Consider timing of dividend income: If possible, defer payoff to after 5 April 2026 if you're near next rate band and likely to benefit from lower rates for that tax year.
- Use dividend allowance: Currently the first £500 of dividend income is tax-free—plan so taxable dividends stay within this if possible.
- Mix of sources: Dividends from companies, unit trusts etc.—consider whether adjusting your mix or locations of investment could reduce higher rate exposure.
Examples
- Example 1 – Basic rate taxpayer: Mary has £500 in dividend allowance and then £2,000 in dividends. Today she pays 8.75% on that £2,000 (
£175). From April 2026, she’ll pay 10.75% (£215), a £40 increase. - Example 2 – Higher rate taxpayer: John has £10,000 in dividends. Under current rate (33.75%) taxed on amount above allowance, post-2026 rate will mean roughly £40 more tax per £1,000 of taxable dividend income.
Actionable Advice for Investors
- Review your current dividend portfolio: estimate how much dividend income you expect in the 2026/27 tax year.
- Use tax wrappers like ISAs, SIPPs where available and beneficial.
- Coordinate with your financial adviser to consider dividend income across tax bands, especially if you're on the edge of moving from basic to higher rate.
- Check whether a spouse or partner has unused ISA or dividend allowances and plan income splitting where legally possible.
Long-Term Outlook & Risks
- With freeze on thresholds, you may drift into higher tax bands even without raises in income.
- Future changes hint at savings/property income becoming more burdened (from 2027). It’s smart to forecast ahead.
- Regulatory risk: changes in legislation, especially for non-UK residents or cross-border dividends, may further complicate planning.
Summary
The dividend rate rise from 6 April 2026 marks a meaningful shift for dividend investors. For those with portfolios outside tax-free wrappers, tax bills will increase. But with judicious use of ISAs, thoughtful timing, and careful portfolio construction, it’s possible to soften the impact—and plan for longer-term rate changes on savings and property income in 2027.