Budget 2025: dividend tax and other personal tax hikes – will the £14.9 billion tax haul affect you?
After months of speculation, in today’s Budget the Chancellor introduced measures to raise an additional £26 billon in tax. Nearly half of that (£14.9 billion by 2029/30) is to be raised through increases in personal taxes, including:
- freeze of personal tax and employer National Insurance contributions (NICs) thresholds until 2030/31, raising £8.0 billion;
- removing the NICs saving on salary-sacrificed pensions contributions above £2,000 p.a. from April 2029, raising £4.7 billion; and
- increasing the tax rates on dividends, property and savings income by 2%, raising £2.1 billion.
The Office for Budget Responsibility (OBR) estimates that 780,000 more people will be brought into paying income tax in 2029/30, largely as a result of the extensions to the freezes. And, of course, if someone pays income tax at a higher rate, this will also affect the rate of dividend tax they pay. Please note: the rate of dividend tax for additional rate tax payers remains unchanged.
How could experienced investors save on a substantial tax bill – whilst supporting dynamic young British businesses? Here we look at tax-efficient investments that could potentially help mitigate the impact.
Tax benefits depend on circumstances and tax rules can change. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. There are limits to the amount that can be invested into some of these investments each tax year and minimum holding periods to retain tax reliefs may apply. Decisions should be based on the investment merit, not the tax reliefs alone.
Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value: you could lose all the money you invest. Tax rules can change and benefits depend on circumstances.
How to receive tax-free dividends
Two types of investment that qualify for tax-free dividends, alongside other tax reliefs, are ISAs and Venture Capital Trusts (VCTs).
ISAs – tax-free dividends and growth
When you invest in a Stocks & Shares ISA any UK dividends paid by the underlying shares are free from tax and do not count towards your personal dividend allowance. Moreover, any income you take is free from UK income tax and gains should be tax free.
Every year, you have an ISA allowance, currently £20,000 if invested in stocks and shares, to be used by the last day of the tax year, 5 April.
If you want to subscribe to an ISA and leave the hassle of selecting the investments to us, the Wealth Club Portfolio Service could be an option to consider. You can also make transfers from an existing ISA.
VCTs – tax-free dividends and growth, up to 30% income tax relief
Akin to investment trusts, VCTs are listed on the London Stock Exchange and typically invest in a portfolio of 30-100 young and ambitious companies. Returns are normally in the form of dividends, which you can re-invest or have paid out tax free. Most VCT state their target dividend – usually around 5% of the trust’s NAV – although dividends are variable and not guaranteed.
In addition, when you invest in VCTs you could claim up to 30% income tax relief. The maximum you can invest in VCTs per tax year and receive tax relief on is £200,000.
Because VCTs invest exclusively in small, young companies, which are more likely to fail than larger and established businesses, the risks of VCT investing are higher than more mainstream stock market investments.
In the Budget, the Chancellor also announced that VCT income tax relief will reduce from up to 30% to up to 20% from 6 April 2026. This might be the last year to invest and benefit from tax relief at the higher rate.
How to get income tax relief
Several types of investment offer different levels of tax relief. As a rule of thumb, the riskier or the more restricted the investment, the more generous the tax relief.
Here we give a brief overview of pensions and the government-backed Venture Capital Schemes: VCTs, the Enterprise Investment Scheme (EIS), and the Seed Enterprise Investment Scheme (SEIS).
Pensions – up to 45% tax relief and tax-free growth
If you are eligible, contributing to a pension offers some of the most generous tax reliefs – including up to 45% tax relief on the way in and tax-free growth while you’re invested. A £10,000 contribution could effectively cost a higher-rate taxpayer as little as £6,000, reducing to £5,500 for a top-rate taxpayer. Read more on how pension tax relief works »
If you want to contribute to a pension and leave the hassle of selecting the investments to us, the Wealth Club Portfolio Service could be an option for you to consider. It is available within our SIPP (Self Invested Personal Pension).
VCTs, EIS and SEIS – 30% to 50% income tax and capital gains tax relief
All three invest in dynamic and ambitious young businesses. These are an important engine of the UK economy but are also higher risk and more prone to failure than their larger counterparts. To help mitigate these risks and to encourage investment, the government offers valuable tax reliefs.
VCTs
- Up to 30% tax relief this tax year – save up to £60,000 on your income tax bill when you invest in newly issued VCT shares
- Generous allowance – invest up to £200,000 per tax year
- Tax-free dividends – no need to declare VCT dividends on your tax return
- Tax-free growth – no CGT on gains
EIS
- Up to 30% income tax relief – up to £3,000 saving on a £10,000 investment either against this tax year's bill or carry back to the previous tax year
- Very generous allowance – up to £1 million per tax year (or £2 million if at least £1 million is in knowledge-intensive companies)
- Tax-free growth if you have also claimed the income tax relief – no CGT on gains
- Capital gains deferral – defer capital gains from other investments, potentially indefinitely
- Loss relief – offset any future losses against your income
- Inheritance tax relief – potentially pass on your investment free of IHT (when held at least two years and on death)
SEIS
- Up to 50% income tax relief – up to £5,000 saving on a £10,000 investment either against this tax year's bill or carry back to the previous tax year
- Generous allowance – £200,000 per tax year
- Tax-free growth if you have also claimed the income tax relief – no CGT on gains
- Up to 50% capital gains reinvestment relief – halve the CGT due on gains from elsewhere
- Loss relief – offset any future losses against your income
- Inheritance tax relief – potentially pass on your investment free of IHT (when held at least two years and on death)
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
Alex Davies
Chief Executive
Alex was a board director at Hargreaves Lansdown, where he worked for 15 years. He was responsible for building Hargreaves Lansdown into the biggest direct-to-consumer SIPP provider in the UK with more than 150,000 clients and over £12 billion under management. He is a keen investor with a portfolio of shares, funds, student property, EIS and VCT investments.