What the hike in the dividend tax rate means for personal and family companies
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The Renters Rights Act only recently received Royal Assent. While detailed guidance is yet to be published, the first phase of reforms will be introduced from 1 May 2026.​
Tenancies
​​In her tax-raising Budget on 26 November 2025, the Chancellor announced that the dividend ordinary rate and the dividend upper rate are to rise by two percentage points from 6 April 2026. This will affect director/shareholders in personal and family companies who extract profits in the form of dividends.
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How dividends are taxed
Dividends have their own tax rates, which are lower than the standard income tax rates. Dividend income which is not sheltered by the personal allowance or the dividend allowance is treated as the top slice of income. It is taxed at the dividend ordinary rate where it falls in the basic rate band, at the dividend upper rate where it falls in the higher rate band and at the dividend additional rate where it falls in the additional rate band.
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For 2025/26, the dividend ordinary rate is 8.75%, the dividend upper rate is 33.75% and the dividend additional rate is 39.35%.
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From 6 April 2026, the dividend ordinary rate rises to 10.75% and the dividend upper rate rises to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.
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All individuals are entitled to a dividend allowance, which is £500 for 2025/26 and remains at this level for 2026/27. The dividend allowance acts as a nil rate band; dividends sheltered by the allowance are tax-free. However, it uses up part of the band in which it falls.
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Impact of the rise
Where profits are extracted as dividends and the shareholder is a basic or higher rate taxpayer, they will pay an additional £20 in tax on every £1,000 of dividends paid in 2026/27 as compared to 2025/26. A shareholder taking £50,000 of dividends a year will pay an additional £1,000 in tax.
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Additional rate taxpayers are unaffected by the change.
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Beating the rise
Where a personal or family company has retained profits, consideration should be given to paying dividends before 6 April 2026 if the tax hit will be lower than if the dividend is paid on or after that date. However, if dividends have already been paid to use up the basic rate band, there is no point paying a dividend if it would be taxed at the dividend upper rate if paid before 6 April 2026 and at the dividend ordinary rate if paid on or after that date; 10.75% is lower than 33.75%.
​In a family company scenario with an alphabet share structure, to minimise the total tax paid on profits extracted as dividends, make sure shareholders’ dividend allowances and basic rate bands are used up before paying dividends taxable at the higher rates.
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Consideration could also be given to extracting profits in other ways, such as employer pension contributions or tax-free benefits in kind.
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The £100,000 cliff edge
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All things being equal, receiving a pay rise which takes your income over £100,000 would be seen as a cause for celebration. However, all things are not equal, and as press reports attest, some people would rather turn down a promotion or cut their hours than take their earnings over £100,000.
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We explain why this is.
Reason 1 – loss of the personal allowance
​​Individuals have a personal allowance of £12,570, allowing them to earn £12,570 before they pay tax. However, once their income exceeds the personal allowance income limit, their personal allowance starts to reduce. The personal allowance income limit is £100,000, unchanged since its introduction.
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Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. A person with adjusted net income of £110,000 will only receive a personal allowance of £7,570 (£12,570 – ((£110,000 – £100,000)/2)).
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Once a person’s adjusted net income reaches £125,140, their personal allowance is lost entirely so that they pay tax from the first pound that they earn.
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The combined effect of the loss of the personal allowance and paying tax at the higher rate of 40% means that the marginal rate of tax between £100,000 and £125,140 is 60%. Add to that National Insurance of 2% and possibly student loan deductions of 9% or 15% and maybe pension contributions, the taxpayer does not actually keep much of the money that they earn between £100,000 and £125,140. Easy to see why some may deem the extra hours or workload as not being worthwhile.
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Once income reaches £125,140, the marginal tax rate drops to 45% (the additional rate).
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Reason 2 – loss of free childcare and tax-free top-up
Working parents may be able to receive free childcare for children from the age of nine months to four years for 30 hours a week for 38 weeks of the year. This is valuable. However, it is only available as long as neither partner has adjusted net income of more than t£100,000. Thus, once income reaches £100,000, free childcare is lost.
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Working parents may also be able to benefit from the Government’s tax-free childcare scheme which provides up to £2,000 a year towards childcare costs (and up to £4,000 a year if the child is disabled). Under the scheme, the Government provides a £2 tax-free top-up for every £8 that the parents deposit in a dedicated account, up to the £2,000/£4,000 maximum top-up. However, as with free childcare, tax-free childcare is not available where either partner earns £100,000 or more.
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For parents with young children, earning £100,000 or more will significantly increase their childcare costs.
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Beating the system
There is a way to have the benefit of earning more than £100,000 a year and keeping your personal allowance, free childcare and the tax-free top-up. This is by making personal pension contributions to reduce your adjusted net income to below £100,000. You will still get the benefit of the money eventually, while retaining the personal allowance and childcare benefits.
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The more altruistic can make charitable donations to reduce adjusted net income to below £100,000, which works in the same way.
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New 40% FYA and reduction in WDAs
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A new 40% first-year allowance (FYA) is to be introduced from April 2026. It will apply to main rate expenditure on new assets, excluding cars. Both companies and unincorporated business will be able to benefit. The new allowance will be available from 1 January2026 for corporation tax and from 6 January 2026 for income tax.
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From 1 April 2026 for corporation tax and 6 April 2026 for income tax the main rate of writing down allowance (WDA) is reduced from 18% to 14%. A hybrid rate will apply where the chargeable period spans the date of the rate change.
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Utilising the new allowance
Companies have a range of options for relieving main rate expenditure in the year in which it is incurred. The annual investment allowance (AIA) provides immediate relief for qualifying expenditure on new and used assets and applies to both qualifying main rate and special rate expenditure. However, it is subject to an annual limit of £1 million.
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Companies can also take advantage of full expensing to deduct qualifying expenditure on new main rate assets. Full expensing is available without limit.
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Like full expensing, the new 40% FYA applies to qualifying expenditure on new main rate assets. As full expensing can be used without limit, the 40% FYA will only be of use to a company where the expenditure is outside full expensing. This will be the case, for example, for assets used for leasing.
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The new 40% FYA is also available to unincorporated businesses.
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The cash basis is the default basis of accounts preparation for traders. It allows capital expenditure to be deducted when computing profits unless the expenditure is of a type for which such a deduction is specifically prohibited. Cars fall into this category. Where a deduction is not allowed, capital allowances can be claimed (unless simplified expenses have been used to claim relief for mileage costs).
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Capital allowances are of more relevance where the trader uses the accruals basis. Unincorporated businesses can access the AIA, but do not benefit from full expensing. The new 40% FYA will be useful to them where the AIA has been used up, and also where expenditure qualifies for the new 40% FYA but not the AIA.
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Where the 40% FYA is claimed, the balance of the expenditure is relieved by main rate WDAs.
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Reduction in the WDA
The rate of WDA on main rate expenditure drops from 18% to 14% from 1 or 6 April 2026. This will lengthen the period over which relief is given for expenditure on main rate assets. It will have an impact where the business opted not to claim the AIA or full expensing on qualifying main rate expenditure or, from January2026, where the new 40% FYA is claimed.
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Cars, other than new zero emission cars, are not eligible for any of the FYAs. Low emission cars are allocated to the main pool. The reduction in the main rate WDA will mean that it will take businesses longer to fully relieve the cost of main rate cars than is currently the case.
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Where the chargeable period spans the date on which the rate changes, a hybrid rate will apply. This will reflect the number of days in the chargeable period before the rate change and the number of days on or after the rate change. For example, where a company prepares accounts to 30 June, the hybrid rate for the period to 30 June 2026 is 17%.
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​​​​New property tax rates
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Unincorporated landlords pay income tax on the profits of their property rental business. This is currently at the normal income tax rates. However, this is set to change from 6 April 2027 when property income will have its own tax rates. The bad news is that the new property tax rates will be two percentage points higher than the current income tax rates.​​​
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Current rates and new rates
For 2025/26 and 2026/27, unincorporated landlords pay income tax on their rental profits at 20% where it falls in the basic rate band, at 40% where it falls in the higher rate band and at 45% where it falls in the additional rate band.
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For 2027/28onwards, rental profits will be taxed at the new property tax rates which are, respectively 22%, 42% and 47%.
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The new property tax rates only apply to landlords running an unincorporated property business; corporate landlords will continue to pay corporation tax on their profits.​
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Interest and finance costs
Where unincorporated landlords incur interest and finance costs, for example, mortgage interest, relief is given as a basic rate tax reduction.
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When the new property tax rates come into effect from 6 April 2027, the rate used to calculate the tax reduction will be the property basic rate of 22%.
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Allocation of personal allowance
The rules which determine the order in which income is taxed are also changing from 6 April 2027. Currently, allowances and reliefs are allocated so as to give the best result for the tax year.
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For 2027/28 onwards, this will no longer be the case. The personal allowance will first be set against employment income, trading income and pension income (taxable at 20%, 40% and 45%) rather than property or savings income (taxable at 22%, 42% and 47%).
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Mitigating the effects
Provisions contained in the Renters’ Rights Act 2025 will limit a landlord’s ability to increase rent to compensate for the tax rise. Where the landlord is increasing rents before these provisions bite, they may wish to factor in the forthcoming tax rises.
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The cash basis is the default basis of accounts preparation for unincorporated landlords with rental income of less than £150,000. Under the cash basis, income is taxed when received and expenses relieved when paid.
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Where possible, landlords should advance income, so it is received before 6 April 2027 to save 2% in tax. In contrast, they could consider delaying expenses until on or after 6 April 2027 so that relief is given at the new (higher) property rates.
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Mansion tax
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A new council tax charge, the High Value Council Tax Surcharge (HVCTS), is to be introduced in April 2028. The charge, dubbed ‘the mansion tax’, will be a recurring annual charge. It will apply to owners of residential properties worth more than £2 million in 2026 and will be levied on the homeowner rather than on the occupier. Social housing will be outside the scope of the charge.​​​
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Council tax, which was introduced in 1993, taxes domestic property to provide money to fund local services. Properties are grouped into eight valuation bands, based on property values in 1991. Local authorities set the charge for each band.
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Under the HVCS, properties worth at least £2 million will be placed in bands based on their property values. The amount of the annual charge will depend on the band into which the property falls. The initial rates are set out below. The charges will increase each year from 2029/30 in line with increases in the CPI.
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The charge will be administered by local authorities alongside council tax.
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The Valuation Office are to undertake a targeted valuation exercise to identify properties valued at £2 million and above. It is expected that less than 1% of properties in the UK will fall within the scope of the HVCS.
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It is interesting that it is the value of the property that determines the contribution to public services rather than the number of people using those services. Two people in a £2 million house are unlikely to use more local services than five people in an £800,000 house.
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The charge takes no account of average property values, the amount of equity in a property and the original purchase cost, or the income of the occupants. Many fairly normal family homes in London are worth at least £2 million – it is questionable whether anyone would regard a three-bed semi as a mansion.
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Where a property was purchased many years ago and is now worth more than £2 million, the owners will not necessarily have the income level now which would support the purchase of a £2 million property. This may be the case for elderly people who have lived in their home for a long time. However, the factsheet published on the HVCTS states that the Government will ensure that a support scheme is in place for those who may struggle to pay the charge but note that ‘it is important this scheme is targeted at those who need it most’.
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The Government are to consult on the details of the charge in early 2026. Support for those struggling to pay and a full set of reliefs and exemptions will form a key part of the consultation. Consideration will also be given to properties with more complex ownership structures, such as those owned by companies, trusts, partnerships and funds. The consultation will also address the treatment of those required to live in a property as a condition of their job.
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