The dividend allowance makes your first £500 of dividend income tax-free each year (down from £5,000 as recently as 2017). Above it, 2026/27 dividend rates are 10.75% in the basic band, 35.75% in the higher band and 39.35% at the top, after each rate rose by 2 percentage points in April 2026.
The squeeze hits company directors who pay themselves in dividends and anyone holding shares outside an ISA. Dividends inside ISAs and pensions remain untouched, which is where most investors should hold income-producing shares first. Work out the damage with the Dividend Tax Calculator.
A director paying themselves £30,000 in dividends gets £500 tax-free and pays 10.75% on the remaining £29,500 within the basic band: £3,171. Two years ago the same dividends cost £2,581 (at 8.75%), so the April 2026 rate rise added £590 to this one salary decision, before Corporation Tax on the profits behind it.
