The chancellor’s need to fill the budget “black hole” trumped over her wish to encourage investing and saving as she lifted income tax on dividends and interest by 2% and created new bands for rental income.
Increasing tax on the income from property, investment and cash assets will raise £2.2bn by 2029/30. The government believes this is a fair way to raise revenue as it redresses an imbalance between the tax rates on unearned income and earned income.
“Those with property, dividend or savings income pay less tax than those whose income comes from employment or self-employment as they do not pay NICs [national insurance contributions],” the Treasury said.
New separate tax rates for property income from April 2027 will be 22% at the basic rate, 42% at the higher rate and 47% at the additional rate.
Cash savers and investors in stocks and shares can avoid income tax by putting their money in tax shelters such as ISAs and pensions. However, outside these they pay tax.
For dividends from investments, after a £500 tax-free annual allowance, their tax rates will rise in 2026/27.
- Basic rate taxpayers: 8.75% to 10.75%
- Higher rate: 33.75% to 35.75%
- Additional rate: unchanged at 39.35%.
Dan Coatsworth, head of markets at stockbroker A J Bell, said: “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.”
Will Ellis, head of specialist funds at Invesco, said: “It appears business owners paying themselves in dividends are being targeted, but this goes against the push to drive savings into investments, as it will also punish those familiar or comfortable with share investing – a group the government is trying to encourage – and who derive an income from their savings.”
On savings the 2% rises mean that from 2027:
- Basic rate: 22%
- Higher rate: 42%
- Additional rate: 47%
The starting rate for savings of £5,000 and personal savings allowance remain unchanged.
