The UK chancellor has confirmed she is increasing the dividend tax rate by 2%, with experts deeming the move “a kick in the teeth for business owners and investors”.

In today’s Budget (26 November) Rachel Reeves said the hike will affect 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, said the decision appears to be aimed 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 ISA and often pay themselves through dividends from profits due to bumpy cash-flow.

Hollands added that dividends are paid out of profits that have already been subject to corporation tax, which is levied at 19% for companies with profits under £50k and 25% for companies with profits over £250k, with marginal relief between those bands.

“These hikes mean that in many cases the Treasury will be milking the same income stream twice,” he said.

“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.

“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.”

Sarah Coles, head of personal finance Hargreaves Lansdown, said investors have been caught in the crossfire of the government taxing business owners.

She pointed out that income investors have faced several increases to the dividend tax rate over the past few years, most recently in April 2022, when it was raised 1.25 percentage points for every tax bracket.

“This tax attack on dividends flies in the face of the government’s desire to encourage investors to hold UK equities,” Coles said.

“Given that the London market is home to so many good income stocks, it means particularly harsh tax treatment if they hold any of these investments outside an ISA or SIPP.

“It risks persuading investors to take their money elsewhere or putting them off investments entirely.

“The UK is already underinvested. The tax system needs to be built to support investors, rather than punishing them and turning them away.”