2025 Budget: Focus on Savings and Dividend Taxes

What was announced?

The government has announced that from April 2027 an extra 2% will be added to the tax rates on savings income. This means that the basic rate will increase from 20% to 22%, higher rate from 40% to 42%, and additional rate from 45% to 47%.

The starting rate for savings will be maintained at its current level of £5,000 until April 2031. The Personal Savings Allowance (‘PSA’) will also be kept at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not benefit from the PSA.

An extra 2% will also be added to the rates of tax on dividends. This will take place from April 2026, a year earlier than the changes to the savings rates. The ordinary rate will increase from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate is not impacted, and the dividend nil rate remains at £500 per individual.

What does it mean for planning?

The increases to savings rates have accompanied freezing in the savings allowances and a reduction in the Cash ISA limit for under=65s, so there will be fewer options for tax-efficient cash holdings from April 2027.

If suitable, offshore investment bond wrappers can provide a roll-up free of tax on investments. If the offshore bond policyholder can realise chargeable gains in the future within unused Personal Allowance, Starting Rate for Savings and Personal Savings Allowance, then they can also achieve a tax-free exit. See our Guide to Offshore Investment Bonds.

Spouses and civil partners should also try to arrange their investment holdings to ensure they fully use both personal allowances, personal savings allowances, dividend allowances and starting/basic rate tax bands.

The rates of tax on dividend income have historically made it an attractive income source for business owners and investors alike. However, in recent years, the appeal of dividends has been reduced by government budget provisions. In 2016, there was a dividend allowance of £5,000. This was reduced to £2,000 in 2018, £1,000 in 2022, and £500 in 2023. Alongside the reduction in the nil rate allowance, the rates of tax also increased in 2018 and now, again, from April 2026.