What you can do as numbers paying dividend tax double

Dividend tax increases have had a significant impact on investors over the past few years, with pensioners and average earners hit particularly hard. In the coming year this is likely to intensify thanks to the latest dividend tax hike. 

A Freedom of Information request from AJ Bell revealed the number of people expected to pay dividend tax in the current tax year has more than doubled since 2022/23, hitting 3.88 million.

And while investors are feeling the pain across the income spectrum, basic rate taxpayers have been particularly badly affected as 1.87 million face bills this year – almost three and a half times the number in 2022/23. 

Some 875,000 pensioners are expected to pay dividend tax this year. That’s 2.4 times the number four years ago. 

For those with smaller portfolios outside ISAs and pensions, the tax bill may be relatively modest, but there’s also the headache of having to complete a tax return. For some, this is the only reason they need to sign up to file one.

Why are millions more paying tax on dividend income?

Over the past few years, the dividend tax allowance has fallen significantly – dropping from £2,000 in 2022/23 to just £500 today. As a result, those with even relatively small portfolios outside an ISA are being confronted with a bill. At the same time, frozen income tax thresholds have pushed more people into higher tax brackets – so they pay a higher rate of dividend tax too. 

Dividends are also rising, and while overall it means more money in investors’ pockets, it also beefs up the slice they hand over to the taxman. Total dividend income has actually risen by more than a fifth (21%) since 2022/23, to around £87 billion, so HMRC is taking in significantly more cash.

Rising fears of inheritance tax (IHT) have also meant more older people will have focused on dividend-producing investments. The rules allow regular gifts from surplus income to fall outside your estate immediately, and dividend income is added to the mix when you’re calculating what counts as ‘surplus’. It means investments can be used to create surplus income, which is then given away IHT-free.

The difficulty is that when this investment is done outside an ISA it can end up building an entirely separate dividend tax headache.

Dividend tax rates have risen in the current tax year for basic and higher rate taxpayers. If a basic rate and higher rate taxpayer both made £1,000 of dividends, they’d both pay £10 more this year than they would have paid on the same dividends in 2025/26, but while for the higher rate taxpayer this would be a 6% rise in their dividend tax bill, for the basic rate taxpayer it’s a 23% hike.

What can you do?

There are five ways to protect yourself from dividend tax.

1. Consider an ISA. You have a £20,000 allowance this year, and any investments within a Stocks and shares ISA are free of both dividend and capital gains tax. Not only does it mean you don’t have to worry about these taxes, you don’t have to report ISA investments on your tax return either, so no more hunting around for dividend slips at the eleventh hour.
2. If you plan to move investments from outside an ISA into the tax wrapper using the Bed and ISA process, and you have more than £20,000 to shift, consider the best assets to move from a tax perspective. It’s often worth prioritising those that produce robust dividends over those targeting capital growth. Dividend tax rates are higher than capital gains tax rates, and you have less ability to plan your way out of it, so protecting yourself from this tax is particularly valuable.
3. Make the move as early as possible in the new tax year. The quicker you do it, the more of your investments will be protected before dividends are paid.
4. Don’t forget your pension. Investments within a pension grow free of dividend tax and capital gains tax. You need to be prepared to tie it up until at least the age of 55 (rising to 57), but if that suits your needs, it’s an incredibly useful tax saving to add to the up-front tax relief.
5. Plan as a couple. If you’re married or in a civil partnership, you can transfer assets so you both take advantage of your dividend tax allowances. If your partner pays a lower rate of tax than you, they can hold the balance, so at least some of it is taxed at a lower rate. If you’re not married, you need to take care over this, because transferring assets can trigger a capital gains tax bill.

What is the background on dividend taxes?

The dividend tax allowance was £2,000 in 2022/23. It was cut to £1,000 in 2023/24 and £500 in 2024/25. This isn’t the first time this allowance has been cut. Back in 2016/17 and 2017/18 it was £5,000.

On 6 April, the dividend tax rate rose from 8.75% to 10.75% for basic rate taxpayers and from 33.75% to 35.75% for higher rate taxpayers. The additional rate remained at 39.35%. The last hike was in April 2022. Before then, dividend tax was charged at 7.5%, 32.5%, and 38.1%. 

Dividend tax is paid on dividends outside pensions and ISAs and over the annual allowance.