Investors who own assets outside of their Isas and pensions were dealt a blow in the Autumn Budget, as chancellor Rachel Reeves announced a dividend tax hike.
The basic and higher rates of dividend tax are set to increase by 2 percentage points from April 2026. This will bring the basic rate to 10.75 per cent, up from 8.75 per cent, while the rate for higher-rate taxpayers will increase from 33.75 per cent to 35.75 per cent. The additional rate will remain unchanged at 39.35 per cent.
Dividends generated from investments held in Isas and pensions remain tax-free. This change will be a further incentive for investors to make the most of their allowances, ensuring they hold as little as possible in taxable general investment accounts.
The Office for Budget Responsibility (OBR) estimates the move will raise £1.2bn a year on average, starting from the 2027-28 tax year. This calculation takes into account the fact that the policy change will invariably prompt investors to reduce their taxable dividend income as a result.
Business owners will also take a hit, as they often pay themselves using a combination of dividends and salary from their company.
“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,” said Jason Hollands, managing director at Evelyn Partners.
“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,” he added.
However, investors and business owners were spared from a rumoured reduction to the dividend tax-free allowance, which remains set at £500 a year. The allowance has already been cut significantly in recent years and stood at £2,000 until April 2023.
Savers also face tax hikes
Cash savers will also be hit by a tax hike from April 2027. The basic, higher and additional rates of savings income tax will all increase by 2 percentage points to 22, 42 and 47 per cent, respectively.
This is the rate of tax people pay on cash savings held outside Isas or pensions, once they have exhausted their personal savings allowance. Currently, the allowance stands at £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and zero for additional-rate taxpayers.
It is likely that the intention behind this is to encourage savers to move their money away from cash and into investments, Laura Suter, director of personal finance at AJ Bell, argued.
“The combined forces of a freeze on income tax bands, higher interest rates and a frozen personal savings allowance have all dragged millions more people into paying tax on their savings – and now they are being clobbered with a tax rise as the cherry on top,” she said.
Those who are most reliant on investment income, such as small business owners or freelancers, who often rely on it to tide them over in quieter periods, will be most impacted.
“This will increase the tax burden on the individuals who are taking risks and driving economic growth,” said David Goodfellow, head of wealth planning at Canaccord Wealth. “Moreover, this is a kick in the teeth for those in retirement and living on their hard-earned savings.”
