In her Budget speech today, the Chancellor has announced a 2% increase to the basic and higher rates of tax on dividends, raising them from 8.75% to 10.75% and 33.75% to 35.75% respectively from April 2026.
Experts have been reacting to today’s dividend tax news in the budget as follows:
Jason Hollands, managing director at wealth management firm Evelyn Partners comments:
‘The last thing the UK really needs right now is more tax on investment and entrepreneurship.
‘These hikes seem to be aimed mainly at extracting more cash from the UK’s small business owners, who don’t have the option of owning their company shares in a tax efficient Individual Savings Account. It will be felt by entrepreneurs as a kick in the teeth, as it takes guts to set up a small business and cash-flow can be uneven and profits uncertain, especially in the current environment where the economy is struggling.
‘Given these uncertain profit streams, many business owners chose to pay themselves only a limited fixed salary and instead opt to pay themselves varying amounts via dividends from profits, and in some cases that makes up the majority of their income.
‘Headline dividend tax rates have long been lower than their corresponding income tax bands. While some may regard this as an anomaly in the tax system, this arrangement has been there for a very good reason: dividends are paid out of profits that have already been subject to corporation tax.
‘This is levied at 19% for companies with profits under £50k and 25% for companies with profits over £250k, with marginal relief between those bands. So, comparing headline dividend and income tax rates is a very partial picture, and these hikes mean that in many cases the Treasury will be milking the same income stream twice. With the rewards for entrepreneurship and risk-taking suffering a number of blows recently – rising National Insurance and capital gains tax burdens among them – it is no wonder many business owners will feel despondent about the increasingly hostile tax environment.
‘The OBR has today confirmed that growth will be lower than even the modest levels previously expected for the rest of this parliament. This is symptomatic of the growing tax burden put on businesses by this government in the form of higher National Insurance costs and a big hike in the minimum wage. But the doom loop in which rising taxes hamper growth will also hammer many small and medium sized enterprises – especially in lower margin sectors like retail, leisure and hospitality – with all the predictable consequences for jobs.
‘And that is before employment rights legislation is enacted that could further damage businesses and jobs by raising the risks of employing staff and reducing labour market flexibility.
‘While business owners may be the main target, the hike in dividend tax rates will also impact anyone owning income generating shares or funds outside of ISA and pension tax wrappers, especially now that the annual dividend exemption is a pitiful £500 a year, having been cut aggressively by the previous Conservative government. As recently as 2017/18 it was as high as £5,000, so it is now frankly a token amount.
‘The Chancellor has talked much about wanting to encourage investment and rejuvenate the UK stock market and to be fair the news that shares in newly listed UK companies will be exempted from stamp duty for three years is a welcome step in the right direction. However, whacking up tax on dividends – one of the standout features of the UK equity market – seems a strange way to go about encouraging greater investment into UK public companies.’
What can be done
Hollands says: ‘People who are in the position of owning listed company shares or income generating equity funds, may have the option of migrating these into an ISA, by selling some or all of them – ideally not exceeding their annual capital gains exemption of £3,000 in the process – and then repurchasing them in a Stocks & Shares ISA. This is a process known as ‘Bed and ISA’ and it will ensure that future dividends and income distributions from these investments will be protected from the taxman.
‘Married couples have the option of using two sets of dividend allowances, two annual capital gains exemptions and two ISAs, by taking advantage of “interspousal transfers”. This involves shifting investments and cash to a spouse and importantly it does not given rise to a taxable event which it would for in the case of unmarried couples. For investments, this effectively involves sending an instruction to the broker or platform that holds your investments. Even where tax cannot be completely eliminated by shifting shares, funds or cash around, moving savings and investments to a spouse who is subject to a lower tax band, can still help reduce an overall family tax bill.’
Lizzie Murray, partner and Head of Private Wealth at Saffery LLP, comments:
“An increase in dividend tax is a blow to business owners alongside the other measures introduced in the October 24 budget that has squeezed businesses and will be another unwelcome change.”
“The rise in dividend tax is going to weigh very heavily on owner-managed businesses and investors. Higher rates make it more expensive to extract profits and could potentially further reduce the tax advantage of incorporation.
“There are ways for businesses to bring forward dividends ahead of the change, which will be tempting for many, but this is a short-term measure. The long-term impact is a significant tightening of the tax screw on entrepreneurs and investors already facing rising costs.”
Sarah Coles, head of personal finance Hargreaves Lansdown:
“In the run up to the Budget, dividend tax changes were touted by the Resolution Foundation as a way to make the taxes on employed people and those who run their own company (and take their income at least partly in dividends) more equal. But investors have been caught in the crossfire.
Income investors have already been hit with a succession of horrible cuts in the annual dividend allowance. It fell from £5,000 to £2,000 back in April 2018, then it was slashed to £1,000 in April 2023 and just £500 in April 2024. To make matters worse, the dividend tax rate was hiked in April 2022 too – up 1.25 percentage points for every tax bracket.
This tax attack on dividends flies in the face of the government’s desire to encourage investors to hold UK equities. Given that the London market is home to so many good income stocks, it means particularly harsh tax treatment if they hold any of these investments outside an ISA or SIPP. It risks persuading investors to take their money elsewhere, or putting them off investments entirely.
The UK is already underinvested. The tax system needs to be built to support investors, rather than punishing them and turning them away.
Dominic Thackray, Independent Financial Adviser at MHA, comments on ISA reforms in the Budget:
ISA Reforms from April 2027 – £12,000 ISA allowance to use for cash or investments, with an additional £8,000 allowance for investments only. Over 65s will be allowed to use the full £20,000 ISA allowance however they choose.
Based on limited tax raises, this isn’t driven by fiscal responsibility and is trying to change our behaviour – the OBR leaked budget suggests this cut this only raises £0.1bn a year. As well as further unnecessary complexity, this is something that makes it harder for those saving for a home, in a market already punishing for first time buyers. While Reeves is correct to suggest that long term, you should expect better returns by investing, investing can be complicated, isn’t without risk and isn’t appropriate for those who don’t want their capital at risk. Why not better educate UK savers on the benefits of investing, make investments easier to access and close the Financial Advice gap – much more could then be done to drive investment. The US doesn’t have an equivalent of an ISA allowance, and yet retail investors drive money into the US economy.
Ingrid McCleave, partner and tax specialist at city law firm DMH Stallard, said:
“The Chancellor has added 2% tax to dividend and savings income, making it 2% higher than equivalent income tax on employment income.
“However, it must be borne in mind that you don’t pay national insurance on dividend or savings income, whereas you do on employment income.
“There are already a number of tax reliefs available on dividend and savings income, some which only benefit lower earners. Interest and dividend income within a tax wrapper such as an ISA is tax free. This benefits high and low earners alike.
“If your total income not including dividend and interest income is less than £17,570 pa (excluding ISAs), you are allowed to receive the first £5,000 of interest income tax free. This benefits lower earners.”
