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Tax specialists are drawing attention to alterations taking effect next week that will impact those holding investments. Tax rates on dividend income exceeding the annual allowance of £500 will climb by two percent for basic and higher rate taxpayers on investments held outside of a tax-free environment.

Revealed by Chancellor Rachel Reeves at last November's Budget, the ordinary rate payable to HMRC will jump from 8.75 percent to 10.75 per cent and the upper rate from 33.75 percent to 35.75 percent from April 6, 2026, which signifies the beginning of the new tax year. The additional rate will stay unaltered at 39.35 percent. These modifications are anticipated to generate £280 million in fresh tax receipts in the forthcoming tax year (2026-27) for HM Treasury, according to specialists at J.P. Morgan.

J.P. Morgan outlined how circumstances had transformed over the previous decade. It stated that, following the replacement of the notional tax credit system in 2016, the UK had slashed the tax-free annual dividend allowance by 90 percent, from £5,000 per tax year to £500, dragging more investors and business owners into paying dividend taxes.

From the initial allowance of £5,000, the allowance has been reduced three times to £2,000 in 2016, then £1,000 in 2023, and to its present level of £500 in April 2024. Simultaneously, dividend tax rates have progressively increased.

In 2016-17, basic rate taxpayers faced a levy of 7.5 percent on dividend income exceeding the allowance, while higher and additional rate taxpayers would be charged 32.5 percent and 38.1 percent, respectively. This climbed by 1.25 percent across all bands in the 2022-23 tax year and will surge by two per cent for basic and higher rate taxpayers in the forthcoming tax year.

For a basic rate taxpayer generating £10,000 in dividends outside their tax-free investment wrappers, they would have witnessed an almost threefold rise in tax paid on this income over the past decade, JP Morgan said. In 2016-17, a basicrate taxpayer earning £10,000 in dividends outside taxfree wrappers would have paid £375 on this income. This has climbed to £831.25 in the current tax year (2025-26) and will jump to £1,021.25 from April 6, 2026.

Research from J.P. Morgan Personal Investing discovered that more than four in 10 (44%) UK investors stated that dividend tax modifications in the forthcoming tax year (2026-27) will affect their investment portfolios. This apprehension escalates to 59% amongst those holding over £250,000 in investible assets.

Charlotte Wheeler, wealth manager and chartered financial planner at J.P. Morgan Personal Investing, said: "Over the last decade, dividend tax changes have been a popular tool to raise new tax receipts, dragging more investors into paying tax on their investments. This is because the tax-free allowance for dividend income has dropped while tax rates have incrementally increased over time.

"For investors, it's important not to overlook dividend tax rules when building wealth as this can dampen returns in an investment portfolio focused on income generation if not managed well. For those with investments held outside tax-efficient wrappers, it's worth paying close attention to the new dividend tax rates coming into force from the new tax year as these changes will impact those who have income investments above the current allowance of £500. While our data shows that those with larger investment portfolios will be most impacted, there is a broader impact for investors as the clock ticks down to the new tax year.

"New retirees who have taken a taxfree pension lump sum may have less flexibility to remedy this as they might want to consider prioritising their ISA for growth investments needed further down the line. There is a trade-off as long-term investments which achieve decent returns could be liable for Capital Gains Taxes (CGT) if held outside an ISA. Some investors will have to weigh up whether they want to sacrifice returns from dividends and instead focus on protecting their growth-focused investments from CGT.

"The Capital Gains tax-free allowance is £3,000, but the rate of tax above the threshold is 18 percent for basic rate taxpayers and 24 percent for those in the higher and additional income tax bands. In the short term, some may be considering moving income-generating investments into their ISA when their annual allowance refreshes on April 6.

"A Stocks and Shares ISA is tax-efficient as you don't pay tax on withdrawals, dividends, or any returns that the investments within the ISA make. It's important to consider your financial goals and how you are using the yield from your investments. For example, if any dividends are being distributed directly to your bank account, it's worth being aware of any savings interest earned and whether this puts you above the personal savings allowance."

Charlotte said: "The 'Bed and ISA' approach has evolved over the years and become a common move by investors who want to bring their investments into a tax-free investment wrapper. The process works by selling the investments outside of a tax-free wrapper and then moving the funds into an ISA or pension, which benefit from CGT-free returns. Some will do this at the start of the tax year when their annual allowances refresh.

"For investors, this approach can be attractive as the movement of funds into a tax-free investment wrapper reduces the potential tax liabilities from Capital Gains or dividend taxes later down the line, though this process isn't always easy. For instance, it's worth being aware of market volatility impacting the value of your investments when you try to sell and then buy back into the market again within the tax-free wrapper.

"Furthermore, investors should familiarise themselves with the thresholds for the CGT allowance if they are selling the investments at a profit before moving them into an ISA or pension. If you are unsure about the 'bed and ISA' approach, it's worth speaking to an expert so you can be sure you are making the right decision based on your circumstances."

J.P. Morgan's research was based on an Opinium survey of 1,000 UK investors undertaken from December 3 to 10, 2025. Opinium Research is a member of the British Polling Council and abides by its rules.