In her Budget speech today, the Chancellor has announced a 2% increase to the basic and higher rates of tax on dividends, raising them from 8.75% to 10.75% and 33.75% to 35.75% respectively from April 2026.
Experts have been reacting to today’s dividend tax news in the budget as follows:
Jason Hollands, managing director at Evelyn Partners, said:
‘The last thing the UK really needs right now is more tax on investment and entrepreneurship.
‘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 Individual Savings Account. 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.
‘Given these uncertain profit streams, many business owners chose to pay themselves only a limited fixed salary and instead opt to pay themselves varying amounts via dividends from profits, and in some cases that makes up the majority of their income.
‘Headline dividend tax rates have long been lower than their corresponding income tax bands. While some may regard this as an anomaly in the tax system, this arrangement has been there for a very good reason: dividends are paid out of profits that have already been subject to corporation tax.
‘This is levied at 19% for companies with profits under £50k and 25% for companies with profits over £250k, with marginal relief between those bands. So, comparing headline dividend and income tax rates is a very partial picture, and these hikes mean that in many cases the Treasury will be milking the same income stream twice. With the rewards for entrepreneurship and risk-taking suffering a number of blows recently – rising National Insurance and capital gains tax burdens among them – it is no wonder many business owners will feel despondent about the increasingly hostile tax environment.
‘The OBR has today confirmed that growth will be lower than even the modest levels previously expected for the rest of this parliament. This is symptomatic of the growing tax burden put on businesses by this government in the form of higher National Insurance costs and a big hike in the minimum wage. But the doom loop in which rising taxes hamper growth will also hammer many small and medium sized enterprises – especially in lower margin sectors like retail, leisure and hospitality – with all the predictable consequences for jobs.
‘And that is before employment rights legislation is enacted that could further damage businesses and jobs by raising the risks of employing staff and reducing labour market flexibility.
‘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. As recently as 2017/18 it was as high as £5,000, so it is now frankly a token amount.
‘The Chancellor has talked much about wanting to encourage investment and rejuvenate the UK stock market and to be fair the news that shares in newly listed UK companies will be exempted from stamp duty for three years is a welcome step in the right direction. However, whacking up tax on dividends – one of the standout features of the UK equity market – seems a strange way to go about encouraging greater investment into UK public companies.’
What can be done
Hollands said: ‘People who are in the position of owning listed company shares or income generating equity funds, may have the option of migrating these into an ISA, by selling some or all of them – ideally not exceeding their annual capital gains exemption of £3,000 in the process – and then repurchasing them in a Stocks & Shares ISA. This is a process known as ‘Bed and ISA’ and it will ensure that future dividends and income distributions from these investments will be protected from the taxman.
‘Married couples have the option of using two sets of dividend allowances, two annual capital gains exemptions and two ISAs, by taking advantage of “interspousal transfers”. This involves shifting investments and cash to a spouse and importantly it does not given rise to a taxable event which it would for in the case of unmarried couples. For investments, this effectively involves sending an instruction to the broker or platform that holds your investments. Even where tax cannot be completely eliminated by shifting shares, funds or cash around, moving savings and investments to a spouse who is subject to a lower tax band, can still help reduce an overall family tax bill.’
Lizzie Murray, partner and Head of Private Wealth at Saffery LLP, said:
“An increase in dividend tax is a blow to business owners alongside the other measures introduced in the October 24 budget that has squeezed businesses and will be another unwelcome change.”
“The rise in dividend tax is going to weigh very heavily on owner-managed businesses and investors. Higher rates make it more expensive to extract profits and could potentially further reduce the tax advantage of incorporation.
“There are ways for businesses to bring forward dividends ahead of the change, which will be tempting for many, but this is a short-term measure. The long-term impact is a significant tightening of the tax screw on entrepreneurs and investors already facing rising costs.”
Sarah Coles, head of personal finance Hargreaves Lansdown, said:
“In the run up to the Budget, dividend tax changes were touted by the Resolution Foundation as a way to make the taxes on employed people and those who run their own company (and take their income at least partly in dividends) more equal. But investors have been caught in the crossfire.
Income investors have already been hit with a succession of horrible cuts in the annual dividend allowance. 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 percentage points for every tax bracket.
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.
The UK is already underinvested. The tax system needs to be built to support investors, rather than punishing them and turning them away.
Dominic Thackray, Independent Financial Adviser at MHA, said:
ISA Reforms from April 2027 – £12,000 ISA allowance to use for cash or investments, with an additional £8,000 allowance for investments only. Over 65s will be allowed to use the full £20,000 ISA allowance however they choose.
Based on limited tax raises, this isn’t driven by fiscal responsibility and is trying to change our behaviour – the OBR leaked budget suggests this cut this only raises £0.1bn a year. As well as further unnecessary complexity, this is something that makes it harder for those saving for a home, in a market already punishing for first time buyers.
While Reeves is correct to suggest that long term, you should expect better returns by investing, investing can be complicated, isn’t without risk and isn’t appropriate for those who don’t want their capital at risk. Why not better educate UK savers on the benefits of investing, make investments easier to access and close the Financial Advice gap – much more could then be done to drive investment. The US doesn’t have an equivalent of an ISA allowance, and yet retail investors drive money into the US economy.
Simon Bashorun, Head of Advice at Rathbones Private Office, said:
“The mansion tax is effectively a wealth tax, disproportionately impacting London and the South East where property values are typically higher. Yet, it is only expected to raise £400–£500 million – a drop in the ocean compared to the multibillion-pound fiscal gap – raising the question: is the juice worth the squeeze?
“The policy is fraught with practical challenges. Valuations will inevitably be contested, and annual assessments for unique, high-value homes are costly and prone to disputes. A surge in appeals could overwhelm government resources, making the system inefficient and expensive to administer.
“Economically, the tax risks creating price cliffs near the threshold, discouraging transactions and renovations. This could stifle housing development and even reduce property tax revenues – undermining the government’s objectives.”
Rebecca Williams, Divisional Lead of Financial Planning at Rathbones, said:
“Capping salary sacrifice at £2,000 is a blunt instrument that risks doing more harm than good. It would strip away a key incentive for employers to boost pension contributions, undermine efforts to tackle the retirement savings gap, and pile extra costs on businesses already under pressure. Worse still, it sends the wrong signal at a time when we should be encouraging long-term financial resilience, not making it harder. This isn’t just a technical tweak – it could have real-world consequences for workers’ futures and employers’ ability to offer competitive benefits.
“The cap also complicates efforts to stay below the £100,000 threshold, where personal allowance tapers and childcare benefits are lost. While personal pension contributions can help, they often require filing a tax return and dealing with HMRC. Stable pension policy is crucial to maintain trust and give people confidence to plan long term.”
W1M’s James Carter, a fund manager overseeing Fixed Income investment, said
“We can be cautiously optimistic about the measures announced by the Chancellor of the Exchequer today. The markets have initially reacted positively, with sterling moving higher and Gilt yields settling 3-4bps lower at most maturities after a period of volatile trading upon the unprecedented leaked release of the Budget by the OBR.
“Markets will cheer the additional tax revenues through the well-flagged tax rises, which have led to an improved fiscal headroom of £22bn to the balanced budget rule, above the upper end of the expected £15-20bn range. However, optimism is somewhat tempered by the back-loaded nature of the measures – with borrowing requirements only falling in the latter years of the forecast, raising the chances of disappointment further down the road.
“While the OBR has increased its growth forecast to 1.5 pc from 1pc for this year, we cannot ignore their downgraded forecasts for the following years, which leaves real GDP growth between 2026-2029 0.3 pc a year lower than the budget watchdog expected in March due to a weaker outlook on productivity gains. Given that the UK’s public finances were already in better shape than many of its peers, the Chancellor will be hoping that inflation starts to decline measurably over time and a virtuous cycle takes hold, with rate cuts more likely, Gilt yields declining, and these growth projections adjusted upwards against a more stimulative monetary policy backdrop.”
Stuart Mellis, CFO, Optalysys, said:
“If the UK is to remain a great place to start and scale a business, increasing both personal and company EMI limits is a sensible move. The government, however, needs to also revisit the threshold for Business Asset Disposal Relief and extend it. The UK cannot ignore the growing number of entrepreneurs choosing to leave the UK. A combination of increasing EMI limits, simplifying share option scheme administration and tailoring CGT rates for scale-up teams are essential to encourage UK-based entrepreneurs to stay in the UK and build world-leading companies here.”
Duncan Johnson, CEO of Northern Gritstone, said:
“Entrepreneurs’ Relief was the best tax regime I’ve seen implemented by a Labour Government. It supported the innovation economy, and the benefits were capped at a sensible level. With constant changes since it was first introduced, the scheme is no longer fit for purpose, and I would have liked to see the policy reset today, so it can go back to what it was meant to do: help and encourage entrepreneurs.”
Tanya Suarez, CEO, IoT Tribe, said:
“The Government’s AI investment plan announced earlier this week, including a £500m Sovereign AI Unit and another £100m to buy domestic AI hardware, is a strong commitment to the UK’s technology ecosystem. However, we’re seeing more and more UK firms head to the US to seek deeper pools of funding or to be acquired. If the UK is to achieve sustained economic growth, we must find the cash to invest in the technologies in which the UK excels.
“This is not a niche opportunity but a critical path to growth and key to reinvigorating a UK-wide industrial base. It is vital to strengthen our technology sovereignty when national security and supply chain resilience are paramount as well. To reaffirm its commitment to being a world leader in science and technology, the UK must align these public investment commitments with incentives for private investors to support later-stage AI and quantum startups. Although the Chancellor made important changes around the Enterprise Investment Scheme (EIS) and signalled her intent to keep the UK’s most promising scaleups on these shores, we need to see further action to really shift the dial.”
David Zahn, Head of European Fixed Income, Franklin Templeton Fixed Income, provides his view post the Autumn Budget
“Today’s UK Budget announcement from the Chancellor sees an increase in spending and borrowing through 2028. However, most of the planned tax rises do not kick in until 2029 and beyond. This approach effectively kicks the can down the road until the next parliamentary election to deal with the spending gap. The probability that those tax changes are delivered seems low given it will be a new parliament, potentially with a different majority party.
“Meanwhile, the OBR’s revised outlook — lower growth post-2025 and higher inflation — should lead Gilts to see higher yields in the long end of the curve.”
Michael Field, chief equity strategist at Morningstar, said:
“The government retained the ISA allowance retained at 20k but changed the allocation such that 8k must be in investments, not cash. Last year around 100bn was saved in ISAs, of which 70% was cash and the rest in equities. This ratio should change to 60/40, which will mean at least another 10bn in equities. This is equivalent to around 0.5% of the FTSE 100, but of course there is no guarantee that any of this is direct to UK equities.
“An almost £40 billion social and affordable home program was announced, with plans to deliver 1.5 million homes over the next decade. Items like planning reform and tax relief on specific works should help UK homebuilding stocks. Expectations were clearly for more however, with shares for the major homebuilders down today. Bad news for existing shareholders, but we see great opportunity in the sector.
UK banks, usually a big beneficiary or victim of budgets, were up around 3% today. This mainly comes on the back of no mention of them in the budget, which having been warned that there could be a levy placed on the sector, is good news. For the most part however, we don’t see much value in UK banks currently.”
Olly Cheng, Senior Financial Planning Director at Rathbones, said:
“The much-mooted LLP tax changes didn’t materialise. While such a measure might have raised additional revenue, it would have added to the burden on a group that we know already contributes significantly to the Treasury from our experiences working with clients in partnerships. The LLP structure exists for legal protection – not to avoid National Insurance.”
James Lynch, Investment Manager at Aegon Asset Management, said:
“Growth up now, down later. Inflation dips next year, then climbs. Spending, taxes, fiscal headroom and borrowing up too.
“For markets there are short term wins – inflation is down by 0.4% thanks to freezing rail fares and lower energy bills, clearing the way for a Bank of England cut in December and into 2026. Additionally, the gilt remit for this year did not increase as much as expected, with several gilt supply events cancelled as a result.
“Over the longer term however, spending has been increased, compared to previous forecasts, paid for by taxes which supposedly start in 2028. Realistically, with an election looming the following year, these quite complicated taxes, such as 3p per mile on Electric Vehicles or valuing high end properties for the mansion tax might not happen. So, the familiar cycle of higher spending today paid by future taxes, which may never materialise, continues.”
Andrew Jones, Portfolio Manager on the Global Equity Income Team at Janus Henderson Investors, said:
“There were no significant negative surprises, given the tax increases already rumoured. Bonds and equity markets have taken a positive initial view. The Chancellor has walked a narrow path by raising taxes in a way that does not add to inflation. This has created scope for the Bank of England to cut interest rates further, created a larger fiscal buffer to remain within her fiscal rules over the forecast period and increased spending in some select areas.”
Guy Foster, Chief Strategist, RBC Brewin Dolphin, said:
“There are always political and economic stakeholders to be managed when releasing a budget. The latter, including the OBR and the financial markets, seem to have been appeased but it typically takes longer to assess the former. It was well known that the Chancellor would need to cut spending or raise taxes because changes to the OBR’s growth forecasts meant that she was no longer on track to meet her fiscal rules. In response, she has undertaken to increase borrowing in the near term, whilst raising the tax burden later.
“The bulk of the delayed pain will come from keeping tax thresholds frozen allowing more taxpayers to drift into higher tax brackets as their wages rise. In addition to this a smorgasbord of additional measures have avoided the need to break a manifesto commitment by raising one of the big taxes such as income tax.
“Investors had been braced for worse and seem to be breathing a sigh of relief in the hours after the release of the budget details. Bond yields which ultimately determine the cost of new borrowing for the government have fallen slightly. The pound is up and there is not meaningful change in the outlook for interest rates.”
Guillermo Felices, Global Investment Strategist for fixed income at PGIM, said:
“This Budget was all about regaining confidence of both the market and Labour MPs, and it is doing the minimum to achieve that. The market reaction is consistent with some confidence being restored, with gilts rallying and sterling stronger versus the US dollar and euro.
“Overall, the Government has increased headroom by £22 billion (versus the £15 billion expected), introduced measures that will help inflation to fall further, and reduced cash requirements a bit, meaning that UK government debt issuance numbers will be more reasonable. This should pave the way for the Bank of England to cut rates, which is positive for gilts.
“The key remaining uncertainties are the fact that the tax increases are backloaded so revenues will only be realised in the future; growth assumptions were trimmed lower, though are still very optimistic hovering at around 1.5% after 2027; and politically, I am not sure the Government has done enough, especially after freezing income tax thresholds. These uncertainties could easily come back to haunt the gilts market in the next few months.”
Marc Acheson, Global Wealth Specialist at Utmost Wealth Solutions, said:
“The government has introduced a cap on relevant property Inheritance Tax charges for trusts which held property excluded from the scope of IHT at 30 October 2024 for former non-doms. The relevant property charges are capped at £5 million over each 10-year cycle.
“They will also explore how to further develop its tax offer for high-talent new arrivals, to build on the success of the existing regime and bolster the ambition for the UK to remain a competitive destination for growth-driving global talent and support internationally mobile individuals to establish themselves and their businesses in the UK.
“Taken together, these two measures appear to be an acknowledgement that the changes announced in last year’s Budget to the non-dom regime went too far, that the UK has lost too many of these individuals, and that policymakers have to do more to stem this outflow and get the country back to becoming an attractive destination for wealth. This is particularly important given the country’s top 1% of taxpayers contribute to a third of all tax revenue.
“However, questions marks remain as to whether these measures will be effective in restoring trust among non-doms and the wider HNW community and prevent further departures. The £5m cap, while limiting the amount non-doms may ultimately have to settle, still represents a significant new charge for individuals who previously paid nothing before April 2025. Additionally, with the Government announcing £26 billion of tax-raising measures in this Budget alone, it is difficult to see how this will encourage new wealthy individuals to move to the UK.”
Mark Preskett, Senior Portfolio Manager at Morningstar Wealth, said:
“Today’s UK Budget has not derailed Morningstar Wealth’s broadly positive outlook for the UK equity and bond markets. Significant focus has been on the UK economy’s fiscal headroom and the improvement here, based on today’s OBR forecasts, is encouraging.
“With inflation showing recent signs of moderation, we would expect Gilt yields to continue their downward trajectory once the dust settles from the Budget. UK business owners will be breathing a sigh of relief as there were no nasty surprises, like the National Insurance hike in the 2024 Budget.
“However, the UK dividend tax hike – which impacts our home market more than others given its higher payouts – is a clear disincentive for stocks and there was no mention of specific UK equity incentives within ISAs.
“Overall, that sterling has strengthened today against both the US dollar and the Euro – a reflection that the Budget has been reasonably well received by investors.”
Liam O’Donnell, a fixed income manager at Artemis, said:
“The big shock for me is that most of the tax raising/fiscal consolidation is heavily backloaded – starting in 2028/29. It just smacks a bit of extend and pretend. Spending is slightly higher near term and the narrative that the Bank of England might have to come to the rescue via more interest rate cuts because higher taxes crush growth has vanished, in my view.
“Today, I think we’re seeing a bit of a relief rally from changes from the DMO remit (they’ve cancelled six auctions and left the market with only a sliver of longs supply via syndication). But ultimately, I don’t think this is positive for the gilt market because what we got – in addition to the early release farce from the OBR – was another episode from Labour where they deliver an unpopular budget without either meaningful spending reductions or meaningful tax increases in the near term. Their continued ability to extract political loss from what seemed like a winning position is impressive.”
