Chancellor Rachel Reeves announced in the Autumn Budget 2025 that dividend tax rates will increase by 2 percentage points from April 2026. This affects every UK company director, agency owner and small business owner who takes dividends as part of their remuneration.
If you run a UK marketing or creative agency, or any small business trading through a limited company, this article explains exactly how much extra tax you will pay and what you can do about it. The dividend tax increase is part of a broader package of tax changes that will impact your cash flow and financial planning.
Quick Summary: UK Dividend Tax Rates 2026
How Much Extra Tax Will You Pay?
The 2% increase applies to all dividend income above your £2,000 annual dividend allowance. Here is what this means in real numbers for typical agency owners and company directors. This extra tax cost will directly impact your cash flow, so it is important to plan ahead.
Basic Rate Taxpayer
For dividends in the basic rate band (after your £2,000 allowance).
Example: £30,000 dividends at basic rate
Higher Rate Taxpayer
For dividends in the higher rate band (after your £2,000 allowance).
Example: £50,000 dividends at higher rate
What To Do Before April 2026
You have until 5 April 2026 to take dividends at the current lower rates. Consider bringing forward planned dividend payments if your company has sufficient retained profits.
Speak to your accountant about timing your dividend payments to minimise the tax impact of the rate increase.
UK Dividend Tax Rates 2026: Complete Breakdown
| Tax Band | Current Rate (2025/26) | New Rate (from April 2026) | Increase |
|---|---|---|---|
| Basic rate | 8.75% | 10.75% | +2.00% |
| Higher rate | 33.75% | 35.75% | +2.00% |
| Additional rate | 39.35% | 39.35% | No change |
The dividend allowance of £2,000 per year remains unchanged. This means the first £2,000 of dividend income you receive each tax year is tax-free, regardless of which tax band you fall into. This £2,000 dividend allowance applies before any tax rates are calculated, so it effectively reduces your taxable dividend income.
How to Calculate Your Dividend Tax
- Start with your total dividend income for the tax year
- Subtract your £2,000 dividend allowance
- Determine which tax band your remaining dividend income falls into (basic, higher, or additional rate)
- Apply the relevant dividend tax rate: 10.75% (basic), 35.75% (higher), or 39.35% (additional)
- Add this to your other tax liabilities (income tax, National Insurance, etc.)
Example: If you receive £30,000 in dividends, subtract £2,000 allowance = £28,000 taxable. At basic rate (10.75%), you pay £3,010 in dividend tax.
Who Is Affected By The Dividend Tax Increase?
The dividend tax increase affects anyone who receives dividend income from UK companies. This includes company directors, shareholders, and anyone taking dividends as part of their remuneration strategy. If you are unsure whether you are affected, your accountant or finance partner can help you understand your tax position.
Company Directors
- Directors taking dividends as part of their remuneration package
- Shareholders receiving dividend payments from their company
- Anyone with dividend income above the £2,000 allowance
Agency Owners & Small Businesses
- Marketing and creative agency owners taking dividends
- Small business owners trading through limited companies
- Contractors and freelancers operating via their own company
Salary vs Dividend: Should You Change Your Remuneration Strategy?
The dividend tax increase makes dividends slightly less attractive, but they remain more tax-efficient than salary for most company directors. Here is why. For a complete guide to forecasting your cash flow and planning for tax changes, see our financial planning framework. Understanding the tax implications helps you make better decisions about your agency's financial metrics.
Dividends vs Salary: The Tax Comparison
Salary (Higher Rate Taxpayer)
- • Income tax: 40% on earnings above £50,270
- • National Insurance: 2% employee + 13.8% employer = 15.8% total
- • Effective rate: ~55.8% on salary above higher rate threshold
Dividends (Higher Rate Taxpayer - After April 2026)
- • Dividend tax: 35.75% (from April 2026)
- • No National Insurance on dividends
- • Effective rate: 35.75% on dividends above allowance
Conclusion: Even with the 2% increase, dividends remain significantly more tax-efficient than salary for higher rate taxpayers. The optimal strategy usually involves taking a small salary (around £12,570 to use your personal allowance) and the rest as dividends. For comprehensive financial planning and to understand how this fits into your overall tax strategy, consider working with a specialist agency accountant.
Other Tax Changes Affecting UK Agencies
The dividend tax increase is part of a broader package of tax changes announced in the Autumn Budget 2025. As a UK agency owner, you should also be aware of:
Property Income Tax
New separate tax rates on rental income from April 2027: 22% (basic), 42% (higher), 47% (additional).
Read full Budget guide →Company Car Tax
Electric vehicles offer significant tax savings through your limited company. Benefit-in-kind rates remain low for EVs.
Learn about company car tax →Your Action Plan Before April 2026
Before 5 April 2026
- Review your company's retained profits and consider bringing forward dividend payments
- Calculate your current dividend tax liability and the extra cost from April 2026
- Review your salary and dividend mix with your accountant to ensure it remains optimal
- Update your cash flow forecast to reflect the higher tax cost from April 2026
From April 2026 Onwards
- Ensure your accounting software is updated with the new dividend tax rates
- Set aside additional funds for your 2026/27 tax bill
- Continue to use the £2,000 dividend allowance each tax year
Frequently Asked Questions About Dividend Tax
When does the dividend tax increase take effect?
The new rates apply from 6 April 2026, which is the start of the 2026/27 tax year. Any dividends you take before this date will be taxed at the current lower rates.
Does the dividend allowance change?
No. The £2,000 dividend allowance remains unchanged. You can still receive up to £2,000 in dividends each tax year without paying any tax on them.
Should I take more dividends before April 2026?
If your company has sufficient retained profits, you may want to consider bringing forward planned dividend payments to benefit from the current lower rates. However, you should only do this if it makes sense for your cash flow and business needs. Speak to your accountant first.
Are dividends still better than salary?
Yes. Even with the 2% increase, dividends remain significantly more tax-efficient than salary for higher rate taxpayers. Dividends are taxed at 35.75% (from April 2026), while salary above the higher rate threshold faces 40% income tax plus 15.8% National Insurance (employee + employer), giving an effective rate of around 55.8%.
How do I calculate my dividend tax?
First, subtract your £2,000 dividend allowance from your total dividend income. Then apply the relevant tax rate: 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, or 39.35% for additional rate taxpayers. Your accountant can help you calculate the exact amount based on your total income. For help with forecasting your tax liability, see our financial planning guide.
What if I'm a basic rate taxpayer?
The increase still affects you, but the impact is smaller. For example, £10,000 in dividends (after your £2,000 allowance) will cost an extra £200 per year. The increase from 8.75% to 10.75% means you pay £1,075 instead of £875. Basic rate dividend tax applies to dividend income that falls within the basic rate income tax band (up to £50,270 for 2026/27).
Get Expert Help With Your Dividend Tax Planning
If you run a marketing or creative agency, you need clear advice on how the dividend tax increase affects your take-home pay and cash flow. Understanding how tax changes impact your key financial metrics is essential for making informed decisions.
Alto Accounting specialises in UK agency accounting. We can calculate exactly how much extra tax you will pay, help you decide whether to bring forward dividend payments, and ensure your salary and dividend mix remains optimal after April 2026. We also help with cash flow planning and Making Tax Digital compliance.
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