Small company owners hit hard by April 2026 dividend tax increase

In today’s Autumn Budget, the Chancellor confirmed that the basic and higher rates of dividend tax will rise by two percentage points from April 2026.

This affects millions of small limited company owners who receive dividends as part of their income, as well as investors who rely on dividend-paying shares and funds.

It is one of the most significant tax changes in the Budget and comes on top a continued freezing of income tax thresholds.

More context on how small businesses are affected by the Budget: Autumn Budget 2025: Chancellor hammers small business owners again.

For a full explanation of how dividends work, read our dividend tax guide.

Dividend tax – what is changing from April 2026?

The basic dividend tax rate rises from 8.75% to 10.75% from April 2026.
The higher dividend rate rises from 33.75% to 35.75%.
The additional dividend rate remains at 39.35%.
The £500 dividend allowance remains unchanged.
Income tax and National Insurance thresholds are frozen until 2031, increasing the risk of being pulled into higher tax bands as nominal incomes rise. This is a hidden but very real tax increase.
Eligible cash ISA rules remain unchanged – the Budget does not reduce allowances on ISAs, so savers can still shelter savings from tax in cash or stocks ISAs. This means dividends taken outside an ISA remain subject to the new rates; dividends inside ISA-wrapped shares stay tax-free.

What the new rates mean in practice

If you run a limited company and draw down profits as dividends (a common way for owner-directors), here are two worked examples based on widely used salary + dividend combinations.

Example 1: £12,570 salary + £37,700 dividends

First £12,570 income is covered by the personal allowance.
First £500 dividends are covered by the dividend allowance.
The remaining £37,200 dividends are taxed at the new basic dividend rate of 10.75% → £3,999.

Under today’s rules: £3,255 tax payable.
From April 2026: £3,999.
Extra tax hit: £744.

Example 2: £12,570 salary + £50,000 dividends

Personal allowance covers the first £12,570.
Dividend allowance covers the first £500 of dividends.
£37,200 taxed at 10.75% → £3,999.
Remaining £12,300 taxed at the new higher dividend rate 35.75% → £4,399.

Under today’s rules: £7,406.25 tax payable.
From April 2026: £8,398.
Extra tax hit: £992.

There’s a handy 2025/26 dividend tax calculator on the ITContracting site.

Why this matters for small company owners and investors

Dividends are payments from a company’s profits to shareholders – for many small limited companies, this is the main way directors extract profits after Corporation Tax has been applied.

In the media, commentators often suggest that dividend tax levels should be the same as income tax rates (20%, 40%, 45%); however, they neglect to point out that the business has already paid Corporation Tax of between 19% and 25% before any dividends are distributed to shareholders.

Given the recent rise in Corporation Tax, plus a vastly less generous dividend tax regime since 2016, company owners haven’t been so heavily taxed in living memory.

Because cash ISA rules were left untouched, investors who hold dividend-producing shares or funds inside an ISA continue to enjoy tax-free growth, making ISAs more attractive.

But for dividend income taken outside an ISA, the tax hike will be a bitter pill for hard-pressed company owners to bear.

The frozen thresholds combined with higher dividend rates mean that even modest nominal income increases over the next few years could push people into higher tax bands, increasing the percentage of profit lost to tax.