If you run your own limited company, your dividend strategy remains one of the most important levers for managing personal tax. However, the 2025/26 tax year continues the trend of tighter allowances and increasing scrutiny from HMRC — and from April 2026 the position becomes even less favourable.
In this blog, we break down the current dividend tax rates for 2025/26, what’s changing, and how company directors should be thinking about profit extraction.
The headline: dividend tax rates for 2025/26
For the tax year 6 April 2025 to 5 April 2026, dividend income is taxed as follows (after your dividend allowance):
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
You also benefit from a £500 dividend allowance, meaning the first £500 of dividend income is taxed at 0%.
How dividend tax actually works (and why it trips people up)
Dividends are taxed differently from salary:
- They are paid from post‑corporation tax profits
- They are not subject to National Insurance
- They are stacked on top of your other income when determining your tax band
That final point is where planning becomes critical.
If you’re already earning a salary that pushes you close to (or into) the higher rate band, even modest dividends can be taxed at 33.75% — significantly reducing the benefit.
The shrinking dividend allowance
The £500 dividend allowance is now a shadow of its former self:
- £2,000 (2022/23)
- £1,000 (2023/24)
- £500 (2024/25 onwards)
This means most directors will now pay tax on their dividends, even at relatively low income levels.
As a result, dividend planning is no longer about avoiding tax entirely — it’s about optimising how much falls into each band.
What’s changing from April 2026
Although this blog focuses on 2025/26, directors need to look ahead.
From 6 April 2026, the government has already confirmed a 2% increase in dividend tax rates:
- Basic rate rises to 10.75%
- Higher rate rises to 35.75%
- Additional rate remains at 39.35%
At the same time, income tax thresholds remain frozen until at least 2031, increasing fiscal drag — meaning more of your income will gradually fall into higher tax bands.
For many directors, this combination significantly reduces the historic advantage of dividends.
Salary vs dividends: still worth it?
Despite the changes, for most owner-managed businesses, the classic strategy still broadly holds:
A low salary (typically up to the personal allowance) topped up with dividends remains tax-efficient.
Internal modelling examples and guidance confirm that:
- Dividends are still generally more efficient than salary at higher income levels
- But the gap between the two approaches is narrowing
- Annual review is now essential to stay efficient
In short: the strategy still works — but much less forgiving of poor planning.
Rather than relying on a “set and forget” approach, directors should now actively manage dividend extraction:
Get the detail behind the numbers
Dividend tax planning is becoming more nuanced each year. To make confident decisions, you need access to clear, up-to-date explanations and practical guidance.
Explore iMemo Tax for practical tax guidance and quick answers
View Tax for Professionals for in-depth analysis and advanced planning
Final thought
For 2025/26, the message is simple: dividends are still effective — but no longer straightforward.
Directors who continue to apply old assumptions risk overpaying tax. Those who review, plan and adapt each year will continue to extract profits efficiently, even in a tightening tax environment.
