Earlier this week, Chancellor Rachel Reeves introduced that dividend tax charges will improve by 2 proportion factors as of April 2026.
And while for most individuals this may increasingly not sound like a lot, for startup founders and entrepreneurs, it’s an enormous blow.
Founders make up an enormous proportion of the UK economic system. They create companies, make use of folks and convey funding into the nation. However the newest funds makes it even more durable for them to reap the advantages of what they’ve constructed, with many saying it’s one of many hardest financial climates for small enterprise house owners in a long time.
Right here, we clarify precisely what it means.
What Precisely Are Dividends?
It’s most likely price beginning on the fundamentals: what are dividends? Nicely, dividends are funds that an organization makes to its shareholders when it makes a revenue. So, if your organization makes cash and there’s revenue left over after taxes, you may select to pay a few of these income out to your self and every other shareholders. That cost is known as a dividend.
Now, should you’re considering that this sounds just a little like paying staff, then there’s an vital distinction to make.
Firstly, dividends come from post-tax revenue, not income. Staff however receives a commission from income. Due to this fact no income = no dividends.
Secondly, dividends are paid after tax, whereas staff are paid earlier than tax. Worker salaries may be famous as a enterprise expense, dividends can’t. When dividends are paid out, this implies the corporate has already paid worker salaries and Company Taxes on the income remaining.
Thirdly, Nationwide Insurance coverage isn’t paid on dividends, however it’s paid on worker salaries. Firms can also’t deal with them like a enterprise expense, they’re extra like a bonus as soon as all bills and taxes have been paid.
Due to this, adjustments to dividend tax don’t have an effect on common staff, however they do have an effect on founders and different individuals who have shares within the enterprise; both by means of worker advantages or funding.
What’s Altering With Dividend Tax?
In line with the funds, from April 2026, dividend tax charges will rise to:
- 10.75% for primary price taxpayers (up from 8.75%)
- 35.75% for greater price taxpayers (up from 33.75%)
- 39.35% for extra price taxpayers (unchanged)
The £500 dividend allowance remains to be there, however this was lowered from £5,000 in 2016 to only £500 right this moment.
This variation is on prime of earnings tax and Nationwide Insurance coverage thresholds being frozen till 2031, which implies extra folks will drift into greater tax bands yearly.
Why Does This Hit Founders and Entrepreneurs The Hardest?
Regardless of claiming that she needs to stimulate progress within the UK economic system, the Chancellor’s choice does have an effect on the folks getting down to construct these companies.
Dividends are a manner that many founders really pay themselves to keep away from operating out of money and guaranteeing all staff and taxes are paid first. This new rise means much more of a companies income head out of founders’ fingers and straight into HMRC’s checking account.
What Do The Specialists Assume?
It’s not simply us at TechRound that assume this tax rise is unfair on founders, we spoke to some consultants too:
Jason Hollands, Managing Director at Wealth Administration Agency: Evelyn Companions
‘The very last thing the UK actually wants proper now’s extra tax on funding and entrepreneurship.
“These hikes appear to be aimed primarily at extracting additional cash from the UK’s small enterprise house owners, who don’t have the choice of proudly owning their firm shares in a tax environment friendly Particular person Financial savings Account. It will likely be felt by entrepreneurs as a kick within the enamel, because it takes guts to arrange a small enterprise and cash-flow may be uneven and income unsure, particularly within the present surroundings the place the economic system is struggling…
“The Chancellor has talked a lot about eager to encourage funding and rejuvenate the UK inventory market and to be honest the information that shares in newly listed UK firms will probably be exempted from stamp responsibility for 3 years is a welcome step in the fitting course. Nonetheless, whacking up tax on dividends – one of many standout options of the UK fairness market – appears an odd strategy to go about encouraging larger funding into UK public firms.”
Greg Cox, Co-Founder and CEO of Quint Group
“The Chancellor claims she is ‘championing innovation’ and ‘backing working folks’, but right this moment’s measures inform a distinct story. Whereas she faces a tough balancing act, the federal government is as soon as once more making selections that may weigh closely on British companies, particularly these attempting to develop, rent, and innovate. For a authorities that claims, ‘non-public funding is the lifeblood of financial progress’, taxing that funding extra closely is a contradictory sign.”
“Climbing dividend tax, freezing earnings tax thresholds, and tightening guidelines on wage sacrifice add as much as a stealth tax on progress, squeezing money move and rising the price of doing enterprise. These insurance policies penalise thousands and thousands of atypical savers and early-stage traders, and disincentivise the very risk-takers we have to create jobs and entice funding.”
Dr Steve Garnett, Former Head of EMEA for Salesforce
“Yesterday’s Finances claims Britain can lead in AI and superior tech, however on this trajectory the UK has no likelihood of constructing the following Nvidia.
“You don’t create world champions by quietly taxing ambition. Freezing private and employer Nationwide Insurance coverage thresholds till 2031 is a protracted, sluggish tax rise on jobs. Rising taxes on property, dividends and financial savings earnings, including a brand new council tax surcharge on properties over £2 million, and capping pension wage sacrifice and worker possession capital beneficial properties aid all ship the identical message: should you construct one thing large and profitable right here, we are going to steadily take extra off you.
“If progress is actually the ‘primary precedence’, the federal government has to cease penalising the very folks and companies that create it.”
Will This Harm The UK’s Startup Financial system?
The reality is, many consultants assume it might. The UK depends closely on companies to spice up the economic system, innovate in new sectors and make use of folks. Dividends was once a manner that founders received a bit of what they had been constructing, at a decrease tax price than earnings tax.
However when operating a enterprise turns into arduous work with much less and fewer achieve – what incentive do entrepreneurs need to construct? And in the event that they aren’t incentivised, how will the UK keep forward of the curve relating to progress? We should wait and see…
