According to Financial Times News, Chancellor Rachel Reeves is considering raising dividend taxes in the November 26 Budget to help fill a fiscal hole estimated at £20bn-£30bn. The Resolution Foundation think-tank has proposed increasing the basic rate from 8.75% to 16.5%, which would generate £1.5bn in additional revenue. Currently, basic rate taxpayers pay 8.75% on dividends, higher rate pay 33.75%, and additional rate face 39.35%. People familiar with the matter say Reeves is considering a smaller increase than the think-tank’s proposal. Wealth managers and bankers are warning that such moves would hurt small business owners and damage investor confidence in the UK economy.
The small business squeeze
Here’s the thing about dividend taxes that many people don’t realize – they hit small business owners way harder than your average investor. Jason Hollands from Evelyn Partners put it bluntly: this would “clobber small business owners” because many take a large portion of their pay through dividends rather than salaries. Basically, when you’re running your own company, dividends are often how you actually get paid. So a tax increase here isn’t just hitting investment income – it’s directly reducing what business owners take home. And these are exactly the people the government says it wants to support – the risk-takers building businesses.
Broader market implications
But it’s not just business owners who’d feel the pinch. Emma Wall from Hargreaves Lansdown makes a compelling point that higher dividend taxes seem “counter to the government’s great initiatives to encourage retail flows.” We’re talking about a government that’s been pushing pension funds and retail investors to back British companies. Now they’re considering making one of the key benefits of UK investing – those reliable dividend payments – less attractive? That doesn’t add up. Steven Fine from Peel Hunt goes even further, suggesting this could actually “be a sure fire way of raising less tax” if companies respond by cutting dividends and doing share buybacks instead.
The UK market at risk
Sanjiv Tumkur from Rathbones raises what might be the biggest concern here. The UK market is packed with income stocks – the kind that pay reliable dividends. If you make those dividends less attractive through higher taxes, investors might shift to growth stocks instead. And guess what? The UK isn’t exactly overflowing with exciting growth companies compared to the US or other markets. So we could see capital flowing out of the UK in search of better opportunities abroad. That would undermine all the work being done to revive our moribund capital markets. It’s worth noting that this comes after the previous government already cut the tax-free dividend allowance dramatically – from £5,000 in 2017-18 down to just £500 from April 2024.
What happens now?
The Treasury isn’t commenting, which usually means something’s brewing. The Resolution Foundation makes a reasonable argument in their report that dividend taxes are low compared to capital gains and international peers. But policy isn’t just about what looks fair on paper – it’s about real-world impact. When you’re dealing with business taxation and investment incentives, you’re playing with economic dynamite. Get it wrong, and you could stall the very growth you’re trying to fund. The November 26 Budget will show whether Reeves listened to these warnings or decided the short-term revenue was worth the long-term pain.
