Chancellor Rachel Reeves has announced a 2 percentage point increase on tax payable on dividends from April 2026, with investors on the ordinary rate paying 10.75% in rather than the current 8.75%.
The upper rate will rise to 35.75% from 33.75%, although the additional rate will remain unchanged at 39.35%.
Jason Hollands, managing director at wealth management firm Evelyn Partners, said: “The last thing the UK really needs right now is more tax on investment and entrepreneurship.
“The hike in dividend tax rates will 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.”
Shaun Moore, tax and financial planning expert at Quilter, said it was a “step in the wrong direction”.
Freedom of Information data revealed the number of dividend taxpayers has surged from 1.9 million in 2022/23 to nearly 3.7 million in 2024/25, with many likely to be dragged into completing a self-assessment tax return for the first time, Moore said.
“Combined with the slashing of the dividend allowance to just £500 previously, these higher rates make dividend taxation increasingly punitive for investors and small business owners,” he said.
So what can investors do about it?
Sarah Coles, head of personal finance Hargreaves Lansdown, said people should switch investments into ISAs as quickly as possible, especially if they have not already used up their full £20,000 allowance this year.
“You can then do the same at the beginning of the next tax year – before any dividends are paid,” she said.
Married couples can transfer assets between them without triggering a tax bill, so they can take advantage of the full ISA allowance of £40,000 between them.
“If this is still going to leave significant assets exposed to dividend tax, when you’re choosing the investments to shelter in an ISA, it’s important to prioritise protecting shares which generate the highest dividends,” Coles said.
“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.”
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