During her 2025 Budget, chancellor Rachel Reeves announced important changes to Dividend Tax rates.
At the start of the coming tax year on 6 April, this legislation will come into force. Depending on the structure of your investment portfolio, this could mean you pay more tax. Business owners who use dividends to extract wealth from their company could also face a higher bill.
As such, it’s important to understand the upcoming changes to Dividend Tax and how they might affect your financial plan.
Dividend income that exceeds a certain threshold may be subject to tax
If you own shares in a business, you may receive dividends. This applies when the company divides its profits and pays a portion to each shareholder, and the amount you receive depends on the number of shares you own.
As such, if you have an investment portfolio or a stake in a business, you might receive dividends.
From the 2025/26 tax year onwards, the first £500 of dividend income is tax-free. This is your Dividend Allowance.
Any dividends that exceed this threshold may be taxed, and the amount you pay depends on your marginal Income Tax rate.
This means that if you have investments outside an ISA and earn more than £500 from dividends in a single tax year, you could pay some Dividend Tax. Bear in mind that even if you invest in an accumulation fund where dividends are reinvested, and you don’t receive them as income, you are still subject to Dividend Tax.
The basic and higher rates of Dividend Tax will increase by two percentage points from April 2026
In an attempt to raise additional revenue, the government is increasing the rates of Dividend Tax from April 2026.
The change affects the basic and higher rates, which will both rise by two percentage points.
This means that from the 2026/27 tax year onwards:
- Basic-rate taxpayers will pay 10.75%
- Higher-rate taxpayers will pay 35.75%.
The additional rate of Dividend Tax will remain unchanged at 39.35%.
Once the rise takes effect, your tax burden could increase. As such, it’s more important than ever to consider ways to mitigate Dividend Tax.
Making use of tax wrappers could help you reduce your Dividend Tax bill
While Dividend Tax could dampen your investment returns, there are ways to shield your portfolio.
If you invest through a Stocks and Shares ISA, you don’t pay any Dividend Tax. There is also no Capital Gains Tax (CGT) to pay when selling investments in this tax wrapper, and you won’t pay Income Tax when you eventually withdraw the funds.
Using as much of your £20,000 ISA allowance each year before investing elsewhere could significantly reduce the Dividend Tax you pay. Now may be a good time to plan how you will use your ISAs in the coming months as your allowance resets on 6 April.
Your pension is another useful tax wrapper that could shield investments from Dividend Tax and CGT. If you’ve already used your ISA allowance for the year, you could contribute additional funds to your pension instead of investing elsewhere.
However, bear in mind that you can’t normally access wealth in your pension until you’re 55 (rising to 57 from April 2028).
Additionally, although the first 25% of your pensions can normally be taken as a tax-free lump sum, you may pay Income Tax on withdrawals from the remaining 75% of your fund. This pension income is treated in the same way as other taxable earnings, so the amount you pay depends on your total income for that year.
We can discuss the various tax wrappers available to you, and how and when you plan to access your wealth, to determine the most tax-efficient ways to invest.
Get in touch
For support with concerns about Dividend Tax rises, or any other tax changes, please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
An ISA is a medium to long-term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Approved by the Openwork Partnership on 24/02/2026
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