The UK Autumn Budget 2025 introduced changes to how UK dividends received by non-UK resident individuals are taxed. While affecting a limited group, the reforms are particularly relevant for non-residents with UK shareholdings and other UK-source income. This article summarises the pre-reform position (including the notional tax credit) and the post-reform rules applying from 6 April 2026, with a practical before-and-after impact overview.
Who Is Affected?
These changes are relevant to individuals who:
- are non‑UK tax resident.
- receive dividends from UK companies; and
- also have other UK‑source income, such as UK rental income or UK partnership income.
How UK Dividends Were Taxed Before April 2026?
Background: No Withholding Tax on UK Dividends
UK dividends are paid gross, meaning no tax is deducted at source. Any UK tax liability arises only through the individual’s UK tax calculation.
For many years, the UK operated a dividend tax credit system known as “Notional Tax Credit”. Although this system was abolished for UK-resident individuals in 2016, a residual form of the credit continued to apply to certain non-UK residents.
What Was the “Notional Tax Credit”?
A notional tax credit was an assumed tax credit given during the tax calculation — even though no tax was actually paid or withheld.
It was called “notional” because:
- no cash was received.
- no tax was deducted from the dividend; and
- the credit existed only on paper, to reduce the UK tax calculation.
How the Credit Worked
Under section 399 of the Income Tax (Trading and Other Income) Act 2005, certain non-UK resident individuals could elect to be assessed on their entire UK income (commonly referred to as the normal method). Where this option was chosen, the individual was permitted to claim the UK Personal Allowance (subject to eligibility) and was also treated as having received a notional tax credit in respect of UK dividend income.
The notional tax credit was calculated at the ordinary rate of dividend tax, which prior to 6 April 2026 was 8.75 per cent. In many cases, the effect of this credit was to reduce the UK tax payable on dividend income to nil.
Example: Operation of the Notional Tax Credit Before 6 April 2026
Brat is non-UK resident for the 2025/26 tax year. He receives UK property income of £42,570 (after allowable expenses) and UK dividend income of £15,000.
As a non-UK resident, Brat has two alternative methods of assessment available to him:
- Under the normal method, Brat includes all UK income in his tax computation and may claim the UK Personal Allowance (if eligible), together with the notional tax credit on UK dividends; or
- Under the disregarded income method, only the non-disregarded income (such as UK property income) is taxed, but Brat is not entitled to claim the UK Personal Allowance or the notional tax credit.
Non-saving income | Dividend income | Total | |
|---|---|---|---|
Uk Property income | 42,570 | 42,570 | |
Dividend income | 15,000 | 15,000 | |
less: personal allowance | -12,570 | -12,570 | |
Taxable income | 30,000 | 15,000 | 45,000 |
Income tax calculation:
Non-saving income
Basic rate @20%: 30,000*20% = £6,000
Dividend income
First £500 dividend taxable income is always tax free.
Remaining dividend income = 15,000-500 = 14,500
Remaining Basic rate band = 37,700-30,000-500 = £7,200
Basic rate @8.75% = 7,200*8.75% = £630
Higher rate @33.75% = (14,500-7,200) * 33.75% = £2,463.75
Total income tax liability of Brat = £6,000+0+£630+£2,463.75= £9,093.75
However, the notional tax credit provides relief only at the ordinary dividend rate of 8.75 per cent, resulting in a credit of £1,312.50 (£15,000 × 8.75%). After applying this credit, the total UK tax payable is reduced to £7,781.25 (£9,093.75 less £1,312.50).
Why Was the Notional Tax Credit Abolished?
The Autumn Budget 2025 announced the abolition of the notional tax credit for non‑UK residents.
The government’s reasoning was fairness and alignment:
- UK residents have not received a dividend tax credit since 2016.
- the continued availability of a credit for non‑UK residents was considered inconsistent; and
- the rule applied to a very small group (fewer than 1,000 individuals per year).
As a result, the legislation granting the credit is repealed.
What Changes From 6 April 2026 And It’s Impact?
1. Abolition of the Notional Tax Credit
From 6 April 2026, non‑UK residents:
- will no longer receive any notional tax credit on UK dividends; and
- will be taxed on dividends without any assumed credit, just like UK residents.
This change applies to dividends received on or after 6 April 2026.
2. Increase in Dividend Tax Rates
At the same time, dividend tax rates increase by 2 percentage points:
Rate band | Before 6 April 2026 | From 6 April 2026 |
|---|---|---|
Ordinary rate | 8.75% | 10.75% |
Upper rate | 33.75% | 35.75% |
Additional rate | 39.35% | 39.35% |
This means non‑UK residents lose the tax credit and face higher dividend tax rates.
Example: Position After 6 April 2026 — Abolition of the Notional Tax Credit and Increase in Dividend Tax Rates
Using the same facts as above, assume instead that Brat receives the dividend income on or after 6 April 2026.
Brat is non-UK resident for the 2026/27 tax year. He receives UK property income of £42,570 (after allowable expenses) and UK dividend income of £15,000.
As a non-UK resident, Brat again has two alternative methods of assessment available:
- Under the normal method, Brat is assessed on his entire UK income and may claim the UK Personal Allowance (if eligible); however, following the Autumn Budget 2025, no notional tax credit is available in respect of UK dividend income; or
- Under the disregarded income method, only the non-disregarded income (such as UK property income) is taxed, and Brat is not entitled to claim the UK Personal Allowance or any tax credit on dividends.
Non-saving income | Dividend income | Total | |
|---|---|---|---|
Uk Property income | 42,570 | 42,570 | |
Dividend income | 15,000 | 15,000 | |
less: personal allowance | -12,570 | -12,570 | |
Taxable income | 30,000 | 15,000 | 45,000 |
Income tax calculation:
Non-saving income
Basic rate @20%: 30,000*20% = £6,000
Dividend income
First £500 dividend taxable income is always tax free.
Remaining dividend income = 15,000-500 = 14,500
Remaining Basic rate band = 37,700-30,000-500 = £7,200
Basic rate @10.75% = 7,200*10.75% = £774
Higher rate @35.75% = (14,500-7,200) * 35.75% = £2,609.75
Total income tax liability of Brat = £6,000+0+£774+£2,609.75 = £9,383.75
Key Comparison: Before vs After
Before April 2026 | From April 2026 | |
|---|---|---|
Dividend tax rate | 8.75% | 10.75% |
Notional tax credit | Yes | No |
Important Clarification: UK Residents
UK‑resident individuals:
- do not receive any notional tax credit.
- never see 8.75% or 10.75% as a credit; and
- simply pay dividend tax at the applicable rate through Self-Assessment.
The notional tax credit was never available to UK residents in recent years.
Conclusion
The notional tax credit was an assumed credit equal to 8.75 per cent that historically reduced the UK dividend tax liability for certain non-UK resident individuals who received UK dividends alongside other UK-source income. This credit applied only in limited circumstances and was available under the full UK income method of assessment.
With effect from 6 April 2026, the notional tax credit is abolished, and at the same time the rates of tax applying to dividend income increase. As a result of these changes, non-UK residents who fall within the scope of the rules will generally face a higher UK tax liability on UK dividend income going forward, and the choice of assessment method will need to be reconsidered in light of the revised tax position.Need Help?
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