Wednesday 26 November 2025 1:05 pm
Dividends are set for a tax hike next year, in a move that could potentially push people away from investing in the stock market.
Individuals who take dividends from a company or who earn dividends from shares pay different tax rates according to the income tax band they fall under.
From April 2026, a two percentage point increase will be inflicted on both basic rate taxpayers and higher rate taxpayers, according to details leaked by the Office for Budget Responsibilities.
Basic rate taxpayers, who earn between £12,571 and £50,270 will now be charged 10.75 per cent up from 8.75 per cent.
Higher rate tax payers, who earn between £50,271 and £125,140 will be slapped with a 37.75 per cent charge up from 33.75 per cent.
Meanwhile, additional rate taxpayers will continues to shoulder a 39.35 per cent.
The levy was last increased by 1.25 percentage points in 2022, under the previous Conservative government.
The rises are estimated to yield £1.2bn a year on average from the 2027-2028 financial year.
It is part of several changes to income tax, with property and savings also subject to a tax hike, and is estimated to raise £2.1bn by the 2029-2030 financial year.
Tax hike calls
The rise to dividend tax comes after think tank The Resolution Foundation called for a basic rate tax rise to at least 16.5 per cent, citing the rate as to “low by any standard” compared to other UK taxes and rates set by other countries.
Ireland has a basic rate which hovers at 20 per cent, whereas in Denmark dividend beneficiaries pay a flat rate of 27 per cent.
However, Reeves did not inflict such a large increase, amid worries that it would hit low earners and pensioners particularly hard and could potentially turn them back towards cash or stop them taking the first step to invest.
Blow to business owners
While the move could raise a significant amount for the Treasury, business owners do not share the sentiment, with those who take a large portion of their pay through dividends set for a heavy hit.
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.
“‘While business owners may be the main target, the hike in dividend tax rates will also 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.”
The hike could send domestic investors overseas for growth opportunities, offsetting the Chancellor’s decision to impose a stamp duty holiday, removing the 0.5 per cent charge for up to three years.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “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.
“But, this hike could also send domestic investors overseas for growth opportunities, offsetting the Chancellor’s decision to impose a stamp duty holiday, removing the 0.5 per cent charge for up to three years.”
Wrap up tight
Those who own shares outside of tax-free wrappers should consider moving funds into accounts such as pensions or a stocks and shares ISA before the tax hike comes into force to avoid having their earners raided.
Dividends in pensions can accumulate without being subjected to either dividend or capital gains tax and do not take up any of the £500 allowance making them a suitable option, however investors are unable to access the funds until they reach 55 in most instances.
Dividends in stocks and shares accounts are shielded from income tax up to £20,000, while also being free from the dividend allowance.