- Dividend tax expected to raise £19.8 billion in 2026/27 following a hike in dividend tax rates
- Tax on people with dividend income spirals, increasing £5 billion in five years
- Tax on savings also set to raise £8.2 billion this year, despite savers stuffing Cash ISAs to shield savings from tax
- The savings tax take for 2025/26 was revised up to £8.4 billion, over 38% higher than originally predicted
- Income tax rates on savings to increase by two percentage points next year, alongside a cut in the Cash ISA allowance for under 65s
- Additional rate taxpayers now pay almost half of all savings and dividend tax
Charlene Young, senior pensions and savings expert at AJ Bell, comments on the latest tax figures on savings and investments:
“Tax bills on investment income will hit almost £20 billion this year thanks to increases in dividend tax rates for basic rate and higher rate investors at the start of the tax year. Chancellor Rachel Reeves announced a dividend tax rate increase of 2% for basic and higher rate taxpayers from April this year, another blow to investors following hot on the heels of brutal cuts to the tax-free dividend allowance under the last government.
“Alongside this, taxes on savings interest are predicted to come in at £8.2 billion, more than quadruple the amount that was collected four years ago. This year’s number is slightly below the £8.4 billion tax take for 2025/26, a figure which has been revised up 38% following sticky inflation and interest rates staying higher for longer.
“Another reason for a slight fall in the savings tax take this year will be the rush to Cash ISAs. Over £15 billion was stuffed in Cash ISAs in the first two months of this tax year alone, which is no surprise when you consider that savers will face a triple threat of tax hits next year. The Cash ISA allowance for under 65s will be cut from £20,000 to £12,000, cash held in non-Cash ISAs will be subject to a 22% flat rate tax charge on any interest paid, and the rates of tax payable on non-ISA savings will increase by two percentage points across the board to 22%, 42% and 47% for each tax band.
“The order of taxation means that income from savings and investments sits on top of people’s earnings and forms the highest slice of their total income. When it comes to savings, frozen income tax thresholds mean more people are finding themselves taxed at higher rates, even when their overall spending power has not increased by the same amount.
“Savings income will account for around 2.4% of the total income tax take in the UK in 2026/27, an increase on the year before. This is no surprise when you consider the personal savings allowance has been stuck at £1,000 for basic rate taxpayers since it was introduced over a decade ago. Those who tip into the higher rate tax band will have an allowance of just £500 while additional rate taxpayers get nothing at all, meaning they face a 45% tax charge on their savings outside of tax wrappers.
Dividend taxes close in on £20 billion
“The government expect to raise £19.77 billion from tax on dividends in the 2026/27 tax year, up 10% from last year. Dividend tax bills continue to climb thanks to an increase in the rates of tax for investors in the basic and higher income tax bands, and the dividend tax allowance continuing to sit at a measly £500.
“When the tax-free allowance for dividends was introduced in 2016, it sat at £5,000, shielding most smaller retail investors. But since the last tax year, it has sat at just £500, meaning these same investors now face a tax bill on investments they don’t hold within a Stocks and Shares ISA.
“Those at the top of the income spectrum are shouldering the majority of the tax burden, despite the numbers being relatively small. Dividends sit at the top of the income stack, and while the very top rate of dividend tax was spared an increase this year, a cut in the additional rate income tax threshold from £150,000 to £125,140 continues to drag more people into the highest rates of taxes in the UK. The dividend tax take from this group is predicted to be over £9.5 billion in 2026/27, or 48% of all dividend tax collected. This is astonishing when you consider this group contains just 3% of the taxpaying population.
“Nevertheless, it’s encouraging to see plenty of taxpayers making use of ISAs to try to beat the dividend tax rise. We have seen a continued increase in Bed and ISA transactions in recent years and particularly at the start of the current tax year, as more people shelter their money in tax-efficient accounts. Other tax planning opportunities for investors are transferring investments to a lower-tax-paying spouse or using pension contributions to drop to a lower income tax band.”
