Budget 2025: dividend tax up 2% from 2026

Sara White, Editor, Business & Accountancy Daily. Croner-i

In a Budget speech full of minor tax changes, chancellor confirmed increase in dividend tax rates.

From the new tax year in April 2026, the base and higher rates of tax on dividend income will increase by 2% to 10.75% for basic-rate taxpayers and 35.75% for higher and additional rate taxpayers.

The current £500 of exempted tax free dividend income will not change, although this has been reduced by successive chancellors and is now very limited.

This move is expected to raise £280m in tax in year one, rising to £985m in 2027-28, with the longer term revenue tax predicted at least £1.16bn a year from 2028 onwards.

Nigel Green, CEO of deVere Group said: ‘For decades the London market has attracted income-orientated investors precisely because of its broad catalogue of dividend-paying, blue-chip companies. Many households rely on that income - often outside ISAs or SIPPs.

‘The new tax regime hits those investors hardest, making long-term ownership less attractive and encouraging early cash-outs. Rather than hold for dividends, investors may sell shares immediately after the next payout, or shift their holdings to more favourable jurisdictions.

‘The signal is clear: if you want growth and yield, UK equities may no longer offer value once the tax drag begins.’

The reduction in dividend tax-free allowance means investing in the stock exchange becomes even less appealing, seemingly flying in the face of Rachel Reeves’ plan to encourage investment activity.

Sarah Coles, head of personal finance Hargreaves Lansdown, said: ‘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% 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.’