Budget 2025 – Dividend tax up 2% from 2026

Budget 2025 – Dividend tax up 2% from 2026

From the next 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.

A spokesperson for a leading investment syndicate has 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 annual dividend allowance has faced a number of cuts. 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.