Investors will have to pay a further 2% on the basic and higher rate of dividend tax from April 2026, a move that is seen as contrary to the Chancellor’s stated aim of getting more UK investors to back British listed companies.
Dan Coatsworth, head of markets at AJ Bell, said: “For a government desperate to encourage more people to invest their money rather than hide in cash, raising taxes on dividends is an odd move to take.
“Dividends function as rewards to compensate investors for the risk of putting their money in the markets. Losing more of that reward to the taxman is deeply frustrating to the investors.
“A lot of people opt for investment or dealing accounts, thinking their name implies a natural home for shares, funds or bonds. In doing so, they are making the mistake of using an account where capital gains and income are subject to tax once allowances are used up. Prioritising tax wrappers such as ISAs or pensions allows investors to keep the full amount of any gains or income.
Income investors have already been hit with a succession of cuts in the annual dividend allowance. It fell from £5,000 to £2,000 back in April 2018, then it was reduced to £1,000 in April 2023 and just £500 in April 2024. In addition, the dividend tax rate was hiked in April 2022 too – up 1.25 percentage points for every tax bracket.
Currently, an investor can earn up to £500 in dividends outside of an ISA or pension in a tax year before they start paying tax on that income. At that point, basic rate taxpayers are charged 8.75%, higher rate taxpayers pay 33.75% and additional rate taxpayers pay 39.35%.
Coatsworth said: “A basic rate taxpayer earning 4% yield on a £100,000 portfolio would receive £4,000 in dividends. The first £500 is free of tax, and they pay 8.75% on the remaining £3,500, equating to £306.25.
“The dividend tax rates will rise next April to 10.75% at the basic rate and 35.75% at the higher rate, and no change to the additional rate. In the same example of a basic rate taxpayer earning 4% yield on a £100,000 portfolio, their tax bill would increase to £376.25.”
Sarah Coles, head of personal finance Hargreaves Lansdown pointed out that 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.
The Budget’s “tax attack on dividends”, she said, 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.”
For investors able to do so, Coles suggests switching investments into ISAs, as well as taking advantage of spousal transfers, which can be undertaken without triggering a tax bill.
If this is still going to leave significant assets exposed to dividend tax, she suggested prioritising protecting shares which generate the highest dividends. “This will leave more growth-oriented investments outside the tax wrappers. It may be subject to capital gains tax, but this can be deferred and managed through annual allowances.”
See also:
Post Budget 2025 Insight – Expert Webinar 10 December 2025
Income tax thresholds frozen until 2031
Chancellor slashes cash ISA allowance in Budget
Chancellor confirms ‘mansion tax’ on properties over £2 million
Cut to salary sacrifice pension perk risks harming retirement outcomes
Tax relief cut undermines VCTs, says industry
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