Budget 2025 - Dividend Tax hike a kick in the teeth for business owners and investors

In the Budget today the Chancellor 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.  
 
Jason Hollands, managing director at wealth management firm Evelyn Partners comments: 
 
‘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 says: ‘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.’