Key tax changes impacting investors in 2026

Personal tax has been a red-hot topic in recent years, with major reforms to UK fiscal policy arriving thick and fast.

Monitoring these developments is vital for investors. While we’re frequently reminded not to let the tax tail wag the investment dog - in other words, finding something suitable is your chief priority – keeping tax bills low is a core pursuit to grow and preserve your wealth.

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Further changes to the tax system are due in 2026, and several of these will impact investors, including higher rates on dividends, frozen thresholds and stingier tax breaks for investing in smaller companies. Let’s analyse what’s coming down the track.

Dividend taxes going up

At her Autumn Budget 2025, Chancellor Rachel Reeves announced that from April 2026 dividend taxes will tick up 2 percentage points. The basic rate, paid on dividends that, when added to other income, fall between £12,570 and £50,270, hikes to 10.75%, while the higher rate, applied on dividends in the £50,271 to £125,140 bracket, increases to 35.75%. The additional rate, however, remains unchanged at 39.35%.

This rise is a further blow for investors with holdings outside tax wrappers, after capital gains tax (CGT) rates on sales of shares increased in October 2024. The basic rate of CGT was jacked up from 10% to 18%, and the higher rate hiked from 20% to 24%.

The first £500 of dividends and £3,000 of gains will remain tax free from April, although we should note that both have reduced significantly in recent years. The dividend and CGT exemptions once stood at £5,000 and £12,300, respectively.

To counter the impact of higher investing taxes, consider using pensions and individual savings account (ISA) as both accounts shelter gains and dividends from HMRC.

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You may also wish to consider your investing strategy inside and outside tax wrappers. For instance, hold investments that aim to pay generous dividends within pensions and ISAs and strategies that focus on growth in your trading account using your £500 exemption where possible. When rejigging your strategy, be careful not to compromise suitability for the sake of trimming your tax bill as this can negatively impact overall portfolio performance.

Income tax and national insurance thresholds frozen

While the headline rates of income tax and national insurance (NI) aren’t going up in 2026, the thresholds will remain frozen. This means that as your income naturally creeps up, inflation will quietly erode its buying power. You may even trip into a higher tax band. And with the deep freeze extended until 2031 at the recent Autumn Budget, the threat of fiscal drag as it’s known in industry jargon, isn’t disappearing any time soon.

If you nudge into either the 40% or 45% bracket, it’s not just your income that faces steeper taxes. As noted above, when earnings exceed £50,270, the tax rates on CGT and dividends increase. What’s more, your savings allowance, the amount of interest you can earn every year tax free, halves from £1,000 to £500.

Even more punishing tax rates await those who trip into six-figure territory.

That’s because for every £2 you earn above £100,000, your £12,570 personal tax allowance is withdrawn by £1, creating a 62% effective tax rate, or 60% if you’re above state pension age and no longer pay NI. And once your income surpasses £125,140, your savings allowance is kiboshed, meaning you pay tax on all savings interest outside tax-efficient accounts.

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One way to combat the harmful effects of fiscal drag is to top up your pension, provided you’re prepared to lose access to the money till age 55 (rising to 57 in 2028).

Let’s say your total income is £110,000: contributing £8,000 to a pension, which is grossed up to £10,000 as 20% relief is added straightaway, can reduce your net adjusted – in other, words taxable – income to £100,000. This saves you 40% income tax and allows you to keep your full personal allowance. If you’re a parent of young children, you may also retain thousands of pounds in free childcare. Just remember to include the pension payment on your tax return.

Thinner tax breaks on smaller companies

Several reforms landing in April 2026 will reduce the tax incentives for investing in smaller companies – a pursuit typically reserved for experienced investors who can stomach significant volatility.

• Cuts to upfront on venture capital trusts

While Reeves didn’t reference this change in her Budget address, the red pages revealed that upfront tax relief on venture capital trusts, VCTs for short, will fall from 30% to 20% from 6 April 2026. While the investment limits for VCTs were increased, and the £200,000 annual limit stays in place, this was an unwelcome development for investors who regularly use the product for its tax advantages. History tells us VCT subscriptions are sensitive to changes to upfront tax relief.

Reports suggest interest in VCTs is surging, as investors seek to capitalise on the more generous tax perks while they’re still available. Wealth Club reported a 538% rise in applications the day after the Budget and this trend is expected to continue over the coming months.

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However, before you funnel any of your cash into VCTs, it’s important to understand the risks. These schemes invest in fledgling businesses, which carry greater odds of failure than more established ones. By default, this means the potential returns on offer can be significant, but there are no guarantees and the potential volatility means you should only invest capital you’re prepared to take a hit on.

VCTs might hold appeal to big earners who are restricted by the tapered annual allowance, which can reduce annual, tax-relievable pension contributions from £60,000 to as little as £10,000. Those in this group may now reconsider their options in light of the cuts to upfront relief.

• IHT reforms to AIM and business relief

As part of the sweeping reforms to inheritance tax (IHT) announced at the Autumn Budget 2024, from 6 April 2026, eligible shares owned for two years in the alternative investment market (AIM) will only attract 50% relief from IHT instead of 100%.

This means AIM will become a less appealing option for investors looking to shelter their portfolio from IHT, as its potential tax-free status will be removed and replaced with a 20% rate.

The advantages for investing in unlisted investments that qualify for business relief will also reduce, although a dramatic U-turn announced two days before Christmas means the reforms will be less severe than initially proposed.

As things stand, qualifying assets held for two years can obtain 100% relief from IHT with no upper limit under business relief rules. However, from April 2026 this will be watered down, with 100% relief applying on the first £2.5 million, and 50% thereafter. The government initially proposed to lower the tax-free threshold to £1 million but changed tack with just months to spare after a ferocious backlash from farms and businesses.

The long and short is that unless you have a significant amount invested in qualifying business relief schemes, you shouldn’t be affected. However, we should note that unlisted investments can offer sizeable returns over long periods, which is something to consider as time goes on, as there’s nothing to suggest the £2.5 million threshold will uprate every year.

Despite these changes, VCTs, AIM stocks and business relief investments will remain attractive for certain investors, but others may need to revisit their existing tax planning strategies and make adjustments, accordingly.

Looking ahead to 2027…

The following year sees more big changes to the tax and savings systems. These include pensions being brought into the IHT net, the annual cash ISA allowance dropping to £12,000 for under 65s, and hikes to taxes on savings interest and property income.

While there’s no need to panic - there’s still 16 months between now and when they will take effect - it’s savvy to get ahead of these key changes and prepare your portfolio, particularly the IHT changes to pensions and cuts to Cash ISAs.

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Passing away with hefty pension savings after April 2027 could result in punishing rates of double taxation on whoever inherits the pot, as well as an admin headache. However, after rowing back on its IHT proposals to farms and businesses, the government has now put itself under pressure to alter its planned shake-up to pensions.

Meanwhile, you may not be able to save as much into Cash ISAs every year, while the facility to transfer from the stocks & shares type to the cash version will be removed.