Dividend tax hiked in blow to investors

Dividend tax has been hiked by two percentage points in this year's Budget as Chancellor Rachel Reeves looks to raise cash for The Treasury.

The change will come into effect from April 2026, and is forecast to raise £1.2bn a year on average for the taxman.

Those who hold investments outside of a stocks and shares Isa or Sipp, or who own their own business and pay themselves in dividends, will likely have to pay more in tax.

This follows repeated cuts in recent years to the tax-free annual dividend allowance, which now stands at just £500.

Here we explain exactly how dividend tax is changing, and how much you might have to pay.

How much dividend tax will I pay in 2026-27?

If you own shares in a company outside of a stocks and shares Isa or Sipp, and receive dividends as a regular income from it, you will likely be affected by this tax measure. 

Dividends from funds and investment trusts are also subject to dividend tax.

The rate of dividend tax you pay depends on your tax band, with the Chancellor announcing a two point hike to the basic and higher rates of tax.

Here's how dividend tax rates are changing:

Note that your dividend income can take you into a higher tax band than your salary might suggest. Someone with a salary of £45,000 and £9,000 of dividends would have some of those dividends charged at the higher rate (more on this below).

This change is expected to raise £1.2bn for The Treasury per year on average, according to the Office for Budget Responsibility. 

This apparently includes the behavioural impact of individuals who may choose to reduce their taxable dividend income in response to the measure.

• Find out more: Dividend tax explained

How much is the dividend tax allowance in 2026-27?

The hike to the rate of dividend tax follows several years of cuts to the annual dividend allowance – the amount of income you can earn each year from dividends tax free.

While the allowance was left untouched today, the allowance has been slashed down in past Budgets from £2,000 in 2023 to just £500 today.

Previous Which? research found that investing as little as £11,574 into a dividend fund could see you hit the £500 threshold.

'This tax attack on dividends flies in the face of the government’s desire to encourage investors to hold UK equities,' said Sarah Coles, head of personal finance Hargreaves Lansdown. 

'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.'

Give a year of super-useful advice

How to get the best deals, avoid scams and grow their savings with expert guidance all year for only £36.75 – that’s 25% off.

Choose and save

Offer ends 8th January 2026

How much could this change cost you?

If your only income is from investments, then you can also use your tax-free personal allowance before you start paying tax on dividends.

So on top of the £500 dividend allowance, you could earn another £12,570 tax-free in 2026-27 (the same as in 2025-26). 

When working out how much tax you pay, HMRC will 'stack' your income, first counting your income from work and pensions and property, then your savings income and then your dividend income.

For example, if you received £45,000 from a job and then £9,000 from dividends, your tax bill would breakdown like this:

• First £12,570 of your employment income falls within the personal allowance. Tax bill: £0
• Remaining £32,430 is taxed at the 20% basic rate. Tax bill: £6,486
• First £500 of dividend income falls within the dividend allowance. Tax bill: £0
• Next £4,770 of dividend income (what's left of your basic-rate threshold for income tax) taxed at the new 10.75% dividend tax basic rate. Tax bill: £512.78 (rounded up)
• Remaining £3,730 of dividend income taxed at the 35.75% dividend tax higher rate. Tax bill: £1,333.48 (rounded up)
• Total tax bill: £8,332.26, made up of £1,846.26 dividend tax and £6,486 income tax. 

If you earn up to £500 in dividends, you don't need to do anything. No need to inform HMRC, just enjoy your dividend income as you see fit.

But if you earn between £500 and £10,000, you'll need to tell HMRC. You can pay the tax due in one of two ways: have HMRC adjust your tax code, so that the tax is taken from your salary or pension, or by filling out a self-assessment tax return.

You can also use our dividend tax calculator to work out your potential tax bill.

• Find out more: Dividend tax calculator 

4 ways to protect yourself from dividend tax

1. Use Isas: Any investments held within a stocks and shares Isa are completely free of dividend tax. You can deposit up to £20,000 into stocks and shares Isas per tax year.
2. Move existing investments into an Isa: You can move your existing investments into an Isa using what’s known as a ‘bed and Isa’ transaction. This process allows you to sell an asset and repurchase it immediately in an Isa or Sipp.
3. Transfer assets to a spouse: You can transfer ownership of assets to your spouse or civil partner tax-free. They can then make use of their own dividend allowance to earn up to £500 in dividend income tax free. They can also move transferred assets into an Isa using their own Isa allowance – known as ‘bed and spouse’ Isa.
4. Consider dividend-free investments: Many companies and funds pay no dividends, and therefore will not be subject to dividend tax. Bear in mind that capital gains tax may be due on any capital gains you make.

Find out more: How to tax-proof your investment portfolio