Since 6 April 2026, dividends above the £500 allowance have been taxed at 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers, both up 2 percentage points, while the additional rate stayed at 39.35% (HMRC; GOV.UK). For dividend investing outside an ISA or pension, that makes the wrapper a bigger part of the return than it was.
The tax change does not alter what makes a dividend sustainable. The old questions still decide whether income keeps arriving: is the dividend covered by profits and cash, why is the yield high, and is the income better collected through individual shares, an income fund or an investment trust.
Dividend investing: what changed in April 2026
| Income tax band | Dividend rate from April 2022 to April 2026 | Dividend rate from 6 April 2026 | Change |
|---|---|---|---|
| Basic rate (dividend ordinary rate) | 8.75% | 10.75% | +2 points |
| Higher rate (dividend upper rate) | 33.75% | 35.75% | +2 points |
| Additional rate | 39.35% | 39.35% | No change |
Sources: HMRC policy paper, 27 November 2025; GOV.UK.
The new rates apply to dividends paid on or after 6 April 2026 and, HMRC says, “apply across the UK”, so Scottish taxpayers pay the same dividend rates as everyone else (HMRC). The first £500 of dividends each year is covered by the dividend allowance, and dividends that fall within your unused personal allowance are not taxed (GOV.UK). The 2026 to 2027 bands are a £12,570 personal allowance, the basic rate to £50,270 and the higher rate to £125,140 (GOV.UK).
A worked example
Take an investor who receives £5,000 of dividends in a general investment account, has already used their personal allowance and whose dividends all fall in one tax band. The first £500 is covered by the allowance, leaving £4,500 taxable.
- Basic-rate taxpayer: £393.75 at the old 8.75% rate, £483.75 at 10.75%.
- Higher-rate taxpayer: £1,518.75 at the old 33.75% rate, £1,608.75 at 35.75%.
- Additional-rate taxpayer: £1,770.75 at 39.35%, unchanged.
For basic and higher-rate taxpayers the rise costs £90 a year on these figures. The example is simplified: real tax depends on how dividends and other income stack across the bands.
The wrapper now does more of the work
You do not pay tax on dividends from shares held in an ISA (GOV.UK), and up to £20,000 can be put into ISAs in 2026 to 2027 (GOV.UK). Income from investments held for a registered pension scheme is free of income tax (Finance Act 2004, section 186), though tax is paid when money comes out of the pension (GOV.UK).
Moving existing shares into an ISA usually means selling them and buying them back inside the ISA, because non-ISA shares cannot simply be transferred in (GOV.UK). The sale can create a capital gain: gains above the £3,000 annual exempt amount (GOV.UK) are taxed at 18% within the basic rate band and 24% above it in 2026 to 2027 (GOV.UK). The next Budget is on 28 October 2026 (Office for Budget Responsibility), and rates and allowances can change at any Budget. Our guide to tax-efficient investing in the UK sets out how ISAs, pensions and general accounts work together, and Budget 2026: what is already decided covers the measures settled before the statement.
Yield: useful, and easy to misread
A dividend yield is the annual dividend divided by the share price. A share paying 20p a year and priced at 400p yields 5%. Yields are usually quoted on the last 12 months of dividends (historic) or on analysts’ estimates (forecast), and the two can differ sharply. For context, the MSCI World index had a dividend yield of 1.52% on 30 September 2026 (MSCI factsheet), so a global tracker fund produces much less income than a portfolio built for yield.
Dividend cover
Dividend cover is earnings per share divided by dividend per share. A company earning 30p a share and paying 20p has cover of 1.5 times: it pays out two-thirds of its profit and keeps a third. Cover below 1 means the company is paying out more than it earns, funding the gap from reserves, asset sales or borrowing, which cannot go on indefinitely.
Earnings are an accounting measure. Many investors also compare the dividend with free cash flow, the cash left after running the business and investing in it, because dividends are paid in cash, not in profits. A company with healthy earnings but weak cash flow may still struggle to pay.
Yield traps
A yield trap is a share whose yield looks high because the price has fallen on bad news, just before the dividend is cut. In a hypothetical case, the 400p share paying 20p falls to 250p when profits collapse. The historic yield now reads 8%, but that figure describes last year’s payout, not next year’s. Common warning signs:
- Dividend cover below 1, or falling year after year.
- Rising debt or a pension deficit competing with shareholders for cash.
- A one-off special dividend inflating the historic yield.
- A yield far above that of similar companies in the same sector.
- Profit warnings, or a dividend policy described as “under review”.
Concentration is the other trap. Income-rich portfolios often cluster in a few sectors, so a problem in one can cut several dividends at once.
Income funds
An income fund collects dividends from many companies and pays them out, usually through income units. The Investment Association’s UK Equity Income sector requires funds to invest at least 80% in UK equities and to aim for a yield above 100% of the FTSE All Share yield on a three-year rolling basis and 90% on an annual basis; its Global Equity Income sector applies a similar test against the MSCI World yield (Investment Association). Unlike investment trusts, most funds have to pay out all the income they receive each year (Association of Investment Companies), so their payouts rise and fall with the dividends of the companies they hold.
Investment trusts and revenue reserves
Investment trusts can smooth their income. A trust may keep back part of each year’s income, up to 15% under the tax rules for approved investment trusts (Investment Trust (Approved Company) (Tax) Regulations 2011, regulation 19), and build a revenue reserve that it can draw on to support dividends when income falls (Association of Investment Companies).
The Association of Investment Companies lists 21 trusts that have raised their dividends for 20 or more years in a row, and a further 30 with 10 to 19 years of increases, as at 23 September 2026 (AIC). A long record of rising dividends is not a promise of future increases, and a trust’s share price can still fall, or trade at a discount to the value of its assets.
A checklist for income investors
- Decide the wrapper first: ISA, pension or general account, and what the April 2026 rates mean for you outside a wrapper.
- Check dividend cover by earnings and by free cash flow.
- Ask why a yield is high before treating it as an opportunity.
- Spread the income across sectors and countries.
- For funds and trusts, compare total costs, income history and, for trusts, revenue reserves and the discount.
For the basics of buying shares, costs and accounts, see our cornerstone guide on how to invest in shares. Past performance is not a guide to future returns.
