Rates are changing as the new tax year begins
Tax experts are highlighting changes next week that will hit people with investments. Tax rates on dividend income above the annual allowance of £500 will increase by two per cent for basic and higher rate taxpayers on investments that are held outside of a tax-free environment.
Announced by Chancellor Rachel Reeves at last November’s Budget, the ordinary rate due to HMRC will rise from 8.75 per cent to 10.75 per cent and the upper rate from 33.75 per cent to 35.75 per cent from April 6, 2026, which marks the start of the new tax year. The additional rate will remain unchanged at 39.35 per cent. These changes are expected to raise £280 million in new tax receipts in the upcoming tax year (2026-27) for HM Treasury, according to experts at J.P. Morgan.
J.P. Morgan explained how things had changed over the past decade. It said that, following the replacement of the notional tax credit system in 2016, the UK had cut the tax‑free annual dividend allowance by 90 per cent, from £5,000 per tax year to £500, pulling more investors and business owners into paying dividend taxes. From the original allowance of £5,000, the allowance has been cut three times to £2,000 in 2016, then £1,000 in 2023, and to its current level of £500 in April 2024.
At the same time, dividend tax rates have incrementally risen. In 2016-17, basic rate taxpayers paid a tax rate of 7.5 per cent on dividend income above the allowance, while higher and additional rate taxpayers would pay 32.5 per cent and 38.1 per cent, respectively. This increased by 1.25 per cent across the bands in 2022-23 tax year and will rise by two per cent for basic and higher rate taxpayers in the upcoming tax year.
Impact on investors
For a basic rate taxpayer earning £10,000 in dividends outside their tax-free investment wrappers, they would have seen an almost threefold increase in tax paid on this income over the past decade, JP Morgan said. In 2016–17, a basic‑rate taxpayer earning £10,000 in dividends outside tax‑free wrappers would have paid £375 on this income. This has risen to £831.25 in the current tax year (2025-26) and will increase to £1,021.25 from April 6, 2026.
Research from J.P. Morgan Personal Investing found that more than four in 10 (44%) UK investors said that dividend tax changes in the upcoming tax year (2026-27) will impact their investment portfolios. This concern rises to 59% among those with over £250,000 in investible assets.
Charlotte Wheeler, wealth manager and chartered financial planner at J.P. Morgan Personal Investing, said: “Over the last decade, dividend tax changes have been a popular tool to raise new tax receipts, dragging more investors into paying tax on their investments. This is because the tax-free allowance for dividend income has dropped while tax rates have incrementally increased over time.
“For investors, it’s important not to overlook dividend tax rules when building wealth as this can dampen returns in an investment portfolio focused on income generation if not managed well. For those with investments held outside tax-efficient wrappers, it’s worth paying close attention to the new dividend tax rates coming into force from the new tax year as these changes will impact those who have income investments above the current allowance of £500. While our data shows that those with larger investment portfolios will be most impacted, there is a broader impact for investors as the clock ticks down to the new tax year.
“New retirees who have taken a tax‑free pension lump sum may have less flexibility to remedy this as they might want to consider prioritising their ISA for growth investments needed further down the line. There is a trade-off as long-term investments which achieve decent returns could be liable for Capital Gains Taxes (CGT) if held outside an ISA. Some investors will have to weigh up whether they want to sacrifice returns from dividends and instead focus on protecting their growth-focused investments from CGT.
“The Capital Gains tax-free allowance is £3,000, but the rate of tax above the threshold is 18 per cent for basic rate taxpayers and 24 per cent for those in the higher and additional income tax bands. In the short term, some may be considering moving income-generating investments into their ISA when their annual allowance refreshes on April 6.
“A Stocks & Shares ISA is tax-efficient as you don’t pay tax on withdrawals, dividends, or any returns that the investments within the ISA make. It’s important to consider your financial goals and how you are using the yield from your investments. For example, if any dividends are being distributed directly to your bank account, it’s worth being aware of any savings interest earned and whether this puts you above the personal savings allowance.”
Bed and ISA strategy
Charlotte said: “The ‘Bed and ISA’ approach has evolved over the years and become a common move by investors who want to bring their investments into a tax-free investment wrapper. The process works by selling the investments outside of a tax-free wrapper and then moving the funds into an ISA or pension, which benefit from CGT-free returns. Some will do this at the start of the tax year when their annual allowances refresh.
“For investors, this approach can be attractive as the movement of funds into a tax-free investment wrapper reduces the potential tax liabilities from Capital Gains or dividend taxes later down the line, though this process isn’t always easy. For instance, it’s worth being aware of market volatility impacting the value of your investments when you try to sell and then buy back into the market again within the tax-free wrapper.
“Furthermore, investors should familiarise themselves with the thresholds for the CGT allowance if they are selling the investments at a profit before moving them into an ISA or pension. If you are unsure about the ‘bed and ISA’ approach, it’s worth speaking to an expert so you can be sure you are making the right decision based on your circumstances.”
J.P. Morgan’s research was based on an Opinium survey of 1,000 UK investors undertaken from December 3 to 10, 2025. Opinium Research is a member of the British Polling Council and abides by its rules.
