Dividend tax hiked in Budget blow to small business owners and investors

Chancellor Rachel Reeves announced a hike to the dividend tax rate in today’s Autumn Budget, in a move that will hit small business owners and retail investors.

The tax on dividend income from stocks and shares will be increased by two percentage points.

It means that basic rate taxpayers will now be charged 10.75 per cent tax on dividends they receive above the annual allowance of £500. 

Dividend income above the allowance was previously charged at 8.75 per cent.

Higher rate taxpayers will be charged at 35.75 per cent when the changes come in in April 2026, up from 33.75 per cent previously. 

The additional rate will remain unchanged at 39.35 per cent, based on information from the Office for Budget Responsibility. 

Hike: Dividend income above the allowance was previously charged at 8.75% for basic rate taxpayers and will now increase to 10.75%

The OBR predicts that this increase will yield £1.2billion per year in extra taxes on average from 2027-2028, with the figures accounting for people reducing their taxable dividend income in response. 

The change is set to hit small business owners who take a portion of their income in dividends, according to tax experts. 

Jason Hollands, managing director at wealth management firm Evelyn Partners, said: ‘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 Isa.’

They also said it would not help encourage Britons to invest instead of save – something the Chancellor wanted to encourage with her cut to the cash Isa allowance today.  

‘The Chancellor has talked much about wanting to encourage investment and rejuvenate the UK stock market,’ Hollands continued. 

‘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.’

Of the £70.5billion of dividend income paid outside of tax-free investments over 2022-23, some £30billion was received by people with incomes of less than £50,000 per year.

Investment platform IG said a two percentage point increase to the tax means that taxpayers can expect to pay an average additional bill of £275, based on the expected tax yield and the 4.35million dividend tax payers. 

Michael Healy, UK managing director at IG, said: ‘Dividend tax changes might look like a quick and painless way to raise revenue, but an increase will hurt millions of people and undermine the Government’s own ambition to build a nation of investors.

‘At a time when households are trying to grow their wealth and the UK stock market needs long-term capital, now is the worst possible moment to make investing in UK stocks less attractive.’

‘Any raid on dividend tax or other investment incomes sends completely the wrong message to the many savers the government wants to convert to investing.’

Craig Rickman, personal finance expert at Interactive Investor, added: ‘Higher dividend tax rates may prompt investors to reconsider how they position their portfolios, focusing on high-yielding stocks within their Isas and pensions, which are exempt from dividend tax, and opting for growth stocks on holdings outside of tax wrappers.’ 

Investors have a £500 dividend tax allowance, which was reduced from £1,000 in April 2024.

Dividend income also isn’t taxed if it falls within the investor’s annual personal allowance of £12,570, when combined with all their income from other sources. 

The move comes as the Government seeks to fill a £20billion black hole in the country’s finances, but is also at odds with the Chancellor’s aim to promote a culture of investing in the UK.

DIY INVESTING PLATFORMS

AJ Bell

AJ Bell

Easy investing and ready-made portfolios

Hargreaves Lansdown

Hargreaves Lansdown

Free fund dealing and investment ideas

interactive investor

interactive investor

Flat-fee investing from £4.99 per month

Freetrade

Freetrade

Investing Isa now free on basic plan

Trading 212

Trading 212

Free share dealing and no account fee

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.

Compare the best investing account for you