Dividend Taxes: Could Rates Rise in the Next Budget?

There is growing speculation that the government may adjust the way dividend income is taxed in the upcoming Budget. With pressure to raise additional revenue, investors and business owners alike are keeping a close eye on whether dividend tax rates or allowances might change.

Current Rules on Dividend Tax

If you receive dividends above the £500 dividend allowance, the following tax rates currently apply:

• 8.75% – Basic rate taxpayers

• 33.75% – Higher rate taxpayers

• 39.35% – Additional rate taxpayers

It’s worth noting:

• Dividends that fall within your Personal Allowance (currently £12,570) are tax-free.

• You may pay tax at more than one rate, depending on how your dividends and other income sit within your tax bands.

• Dividends from shares held in an ISA remain tax-free.

Dividend Allowance Over Time

This shrinking allowance highlights a clear trend: fewer dividends are now tax-free.

Reporting Dividend Income

How you report dividend income depends on how much you receive:

• Up to £10,000 in dividends – You can either enter the income on your Self Assessment tax return (if you already file one), or ask HMRC to collect the tax by adjusting your tax code.

• Over £10,000 in dividends – You must register for Self Assessment (if not already filing) and complete a tax return. Registration must be done by 5 October following the end of the tax year in which the income was received.

You don’t need to tell HMRC if your dividend income stays within the annual allowance.

What Might Change?

The government has already reduced the dividend allowance from £2,000 to just £500 in recent years. Now, with continued fiscal pressures, further changes could be on the horizon:

• Higher dividend tax rates – An increase across tax bands cannot be ruled out.

• Complete removal of the £500 allowance – Investors may lose this small tax-free buffer altogether.

Any such measures would affect shareholders, directors of owner-managed businesses, and anyone supplementing their income through dividends.

📌 Pandey & Co. Insight: While no decisions have yet been announced, now is the time to review your dividend strategy. Planning ahead can help mitigate unexpected tax increases and ensure your finances remain as efficient as possible.