Most people accept that paying some amount of tax is important as a contribution to wider society, but it doesn’t mean we are jumping for joy when our tax bill is looking larger than last year.
It doesn’t help that the tax system is full of convoluted language and scenarios, which can mean that if you aren’t careful, you could end up with a much bigger bill than people earning similar amounts, or even larger sums. There are though things you can do to help shield your money.
HMRC’s latest figures revealed that the average basic rate taxpayer is expected to have an average income tax rate of 10.4% in the 2026/27 tax year, with higher rate taxpayers at 20.8% and additional rate taxpayers at 37.5%. These figures include tax rates on earnings, savings and dividends, and subtract allowances that are given as income tax reductions.
The portion of income you pay as tax will vary from these average figures depending on if you sit at the high or low end of the tax bracket, and where most of your wealth is held. But it could still help you get your bearings on where you stand.
The taxes ramp up quickly, specifically for additional rate taxpayers. While the bracket may be characterised as the preserve of the ultra wealthy, the number of Brits classed as additional rate is growing rapidly: HMRC predicts a 44% increase in additional rate taxpayers in the 2026/27 tax year from three years ago, and a 33.8% increase in higher rate taxpayers. With tax thresholds staying frozen as inflation continues, more and more people will find themselves nudged into the next bracket, even while their lifestyle stays the same.
Most people think of the tax on your salary or pension when it comes to income tax, but this also encompasses savings tax and dividend tax, which can have a really significant impact on your wallet.
Who’s shouldering the dividend tax bill?
For the 2026/27 tax year, basic and higher rate taxpayers will stomach a 2% rise on dividend tax, putting the rates at 10.75% for basic rate, 35.75% for higher rate, and 39.35% for additional rate. In total, the government is expected to collect nearly £20 billion in dividend tax this year, up 10% from the year before.
While additional rate taxpayers didn’t face an increase on their dividend tax bill this year, they still are expected to pay 48% of the dividend tax in total, while accounting for 3% of the taxpaying population. Higher rate taxpayers are now on track to pay nearly 35%.
Limiting dividend taxes
Investors only have a £500 allowance for dividend tax each year, which can be easy to override particularly as the dividends companies pay can fluctuate significantly. Dividend tax applies to any payouts you are receiving from stocks, either directly or through a fund, outside a tax wrapper like an ISA or pension.
Dividends sit on top of your other income when working out what band they are in. This can mean quite a punchy bill for those that slip into the higher and additional rate tax categories.
Keeping your investments wrapped in an ISA or a pension is the easiest way to steer clear of dividend tax. Increasing pension contributions not only means you get the upfront tax relief, but you’re also protected from income tax, including dividend tax, while it’s in the tax-free wrapper.
If you’ve exceeded your allowances, and hold funds outside those wrappers, you might be running into dividend tax issues without even realising. Most funds will hold some companies that pay dividends, and even if you hold an accumulation version of that fund where the money is reinvested, you are still liable for tax on the dividends the stocks you hold in the fund pay each year.
Couples might consider moving some of their money to their spouse or civil partner once they’ve used their own allowances. This creates access to a second ISA allowance and means that there’s another £500 dividend allowance to play with outside the tax wrappers. If your spouse has a lower income, it may also mean they face a lower rate of tax if they do start to exceed the tax-free allowance. However, those taking the method of dividing assets between spouses need to understand that once that money is gifted, it officially belongs to your partner, not you.
Being strategic about what investments are held in and outside your tax wrappers can help reduce this bill. For example, you may be better off keeping funds that have high growth rates or that hold stocks paying high dividends inside a tax wrapper and hold lower risk investments, which will generate less income, outside the wrapper.
Hannah Williford: Investment Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
