Earlier this week, Chancellor Rachel Reeves announced that dividend tax rates will increase by 2 percentage points as of April 2026.
And whilst for most people this may not sound like much, for startup founders and entrepreneurs, it’s a big blow.
Founders make up a big percentage of the UK economy. They create businesses, employ people and bring investment into the country. But the latest budget makes it even harder for them to reap the benefits of what they have built, with many saying it’s one of the toughest economic climates for small business owners in decades.
Here, we explain exactly what it means.
What Exactly Are Dividends?
It’s probably worth starting at the basics: what are dividends? Well, dividends are payments that a company makes to its shareholders when it makes a profit. So, if your company makes money and there’s profit left over after taxes, you can choose to pay some of those profits out to yourself and any other shareholders. That payment is called a dividend.
Now, if you’re thinking that this sounds a little like paying employees, then there’s an important distinction to make.
Firstly, dividends come from post-tax profit, not revenue. Employees on the other hand get paid from revenue. Therefore no profits = no dividends.
Secondly, dividends are paid after tax, whereas employees are paid before tax. Employee salaries can be noted as a business expense, dividends can’t. When dividends are paid out, this means the company has already paid employee salaries and Corporation Taxes on the profits remaining.
Thirdly, National Insurance isn’t paid on dividends, but it is paid on employee salaries. Companies also can’t treat them like a business expense, they’re more like a bonus once all expenses and taxes have been paid.
Because of this, changes to dividend tax do not affect regular employees, but they do affect founders and other people who have shares in the business; either through employee benefits or investment.
What’s Changing With Dividend Tax?
According to the budget, from April 2026, dividend tax rates will rise to:
- 10.75% for basic rate taxpayers (up from 8.75%)
- 35.75% for higher rate taxpayers (up from 33.75%)
- 39.35% for additional rate taxpayers (unchanged)
The £500 dividend allowance is still there, but this was lowered from £5,000 in 2016 to just £500 today.
This change is on top of income tax and National Insurance thresholds being frozen until 2031, which means more people will drift into higher tax bands every year.
Why Does This Hit Founders and Entrepreneurs The Hardest?
Despite claiming that she wants to stimulate growth in the UK economy, the Chancellor’s decision does affect the people setting out to build these businesses.
Dividends are a way that many founders actually pay themselves to avoid running out of cash and ensuring all employees and taxes are paid first. This new rise means even more of a businesses profits head out of founders’ hands and straight into HMRC’s bank account.
What Do The Experts Think?
It’s not just us at TechRound that think this tax rise is unfair on founders, we spoke to some experts too:
Jason Hollands, Managing Director at Wealth Management Firm: Evelyn Partners
‘The last thing the UK really needs right now is more tax on investment and entrepreneurship.
“These hikes seem to be aimed mainly 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 Individual Savings Account. It will be felt by entrepreneurs as a kick in the teeth, as it takes guts to set up a small business and cash-flow can be uneven and profits uncertain, especially in the current environment where the economy is struggling…
“The Chancellor has talked much about wanting to encourage investment and rejuvenate the UK stock market and to be fair the news that shares in newly listed UK companies will be exempted from stamp duty for three years is a welcome step in the right direction. However, 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.”
Greg Cox, Co-Founder and CEO of Quint Group
“The Chancellor claims she is ‘championing innovation’ and ‘backing working people’, yet today’s measures tell a different story. While she faces a difficult balancing act, the government is once again making choices that will weigh heavily on British businesses, especially those trying to grow, hire, and innovate. For a government that says, ‘private investment is the lifeblood of economic growth’, taxing that investment more heavily is a contradictory signal.”
“Hiking dividend tax, freezing income tax thresholds, and tightening rules on salary sacrifice add up to a stealth tax on growth, squeezing cash flow and increasing the cost of doing business. These policies penalise millions of ordinary savers and early-stage investors, and disincentivise the very risk-takers we need to create jobs and attract investment.”
Dr Steve Garnett, Former Head of EMEA for Salesforce
“Yesterday’s Budget claims Britain can lead in AI and advanced tech, but on this trajectory the UK has no chance of building the next Nvidia.
“You do not create global champions by quietly taxing ambition. Freezing personal and employer National Insurance thresholds until 2031 is a long, slow tax rise on jobs. Increasing taxes on property, dividends and savings income, adding a new council tax surcharge on homes over £2 million, and capping pension salary sacrifice and employee ownership capital gains relief all send the same message: if you build something big and successful here, we will steadily take more off you.
“If growth is truly the ‘number one priority’, the government has to stop penalising the very people and businesses that create it.”
Will This Hurt The UK’s Startup Economy?
The truth is, many experts think it could. The UK relies heavily on businesses to boost the economy, innovate in new sectors and employ people. Dividends used to be a way that founders got a piece of what they were building, at a lower tax rate than income tax.
But when running a business becomes hard work with less and less gain – what incentive do entrepreneurs have to build? And if they aren’t incentivised, how will the UK stay ahead of the curve when it comes to growth? We will have to wait and see…
