The Chancellor has confirmed that dividend tax rates will increase by two percentage points from April 2026.
In today’s Budget (26 November), Rachel Reeves announced that the basic dividend tax rate will rise from 8.75% to 10.75%, while the higher rate will increase from 33.75% to 35.75%.
Jason Hollands, managing director at Evelyn Partners, said the move will feel like “a kick in the teeth” for small business owners and entrepreneurs who rely on dividends as a primary income stream.
He warned that the increase penalises those who take commercial risk and manage volatile profit flows, especially because dividends are already paid from profits that have been subject to corporation tax.
“These hikes mean the Treasury will be milking the same income stream twice. Many business owners pay themselves via dividends to reflect uncertain profits. Increasing the tax burden at this point will feel hostile to entrepreneurship and risk-taking,” he said.
Hollands added that rising NI costs, a shrinking dividend allowance and a lower CGT threshold have already taken their toll on business owners.
“It is no wonder many business owners will feel despondent about the increasingly hostile tax environment.”
The change will also affect millions of investors holding income-generating shares and funds outside ISAs or pensions. The annual dividend allowance has been repeatedly cut, falling from £5,000 in 2017 to just £500 this year, pushing more basic-rate taxpayers into paying dividend tax.
Independent analysis suggests a basic-rate taxpayer could pay £500 a year more in dividend tax by 2029/30.
Michael Healy, UK managing director at IG, said: “Increasing dividend tax sends exactly the wrong message at a time when the Government is trying to encourage long-term investing.”
Anthony Whatling, tax managing director at Alvarez & Marsal, said: “If the Government is serious about growth, it must focus on policies that incentivise investment and risk-taking, not penalise it.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “With the allowance slashed repeatedly, investors need to rethink how they hold dividend-paying assets. It is vital to protect the highest-yielding holdings using ISAs and pensions where possible.”
