- Investors face a 2% increase in the basic and higher rate of dividend tax from April 2026
- The chancellor is increasing dividend tax rate despite trying to drive more Brits towards investing
- How much additional tax investors can expect to pay
Dan Coatsworth, head of markets at AJ Bell, comments:
“For a government desperate to encourage more people to invest their money rather than hide in cash, raising taxes on dividends is an odd move to take. Dividends function as rewards to compensate investors for the risk of putting their money in the markets. Losing more of that reward to the taxman is deeply frustrating to the investor.
“A lot of people opt for investment or dealing accounts, thinking their name implies a natural home for shares, funds or bonds. In doing so, they are making the mistake of using an account where capital gains and income are subject to tax once allowances are used up. Prioritising tax wrappers such as ISAs or pensions allows investors to keep the full amount of any gains or income.
Putting the changes into practice
“Currently, an investor can earn up to £500 in dividends outside of an ISA or pension in a tax year before they start paying tax on that income. At that point, basic rate taxpayers are charged 8.75%, higher rate taxpayers pay 33.75% and additional rate taxpayers pay 39.35%.
“For example, a basic rate taxpayer earning 4% yield on a £100,000 portfolio would receive £4,000 in dividends. The first £500 is free of tax, and they pay 8.75% on the remaining £3,500, equating to £306.25.
“The dividend tax rates will rise next April to 10.75% at the basic rate and 35.75% at the higher rate, and no change to the additional rate. In the same example of a basic rate taxpayer earning 4% yield on a £100,000 portfolio, their tax bill would increase to £376.25.”
