Recent changes to dividend rules have dealt a double blow to shareholders. The Dividend Allowance has been shrunk substantially, while Dividend Tax has increased for all tax bands.
Effectively, your dividend income could have diminished significantly, even if your shares have been profitable.
There are steps you can take to mitigate these effects, however. This is why it’s important to understand the facts about dividends, including the all-important Dividend Allowance and Dividend Tax rates, so you can make informed decisions.
Dividends are paid to shareholders as a reward for investing in that company
There are several reasons why a company pays out dividends. Essentially, these payments are distributed to shareholders when the organisation makes a profit.
You’ll often read about “keeping shareholders happy”, as regular dividends indicate that the company they’re investing in is financially healthy and profitable.
As a shareholder, you’ll look favourably on a company that provides regular dividend payments, which could make you more likely to buy more shares.
Plus, new investors looking to purchase shares might more readily opt for a company with a proven track record of rewarding its shareholders.
Dividends are paid in two ways:
- Cash, as a lump sum
- Stocks, as additional shares in the company.
If you receive a cash dividend, you might take the regular income or choose to reinvest it instead.
That’s the good news. But as with most things financial, there are tax considerations too.
Reduced Dividend Allowance and increased Dividend Tax have seen shareholders squeezed
Back in 2017/18, the tax-free Dividend Allowance was a relatively generous £5,000, but in 2018/19 it reduced to £2,000. In 2023 it reduced again, to just £1,000. It was halved once more, to just £500, from April 2024.
Dividend Tax rates are currently:
- 8.75% for basic-rate taxpayers
- 33.75% for higher-rate taxpayers
- 39.35% for additional-rate taxpayers.
To determine how much tax you pay, your dividends and any other income are considered, with tax payable above your Personal Allowance of £12,570 (for the 2025/26 tax year). The tax you pay might be at different rates, as some will be Income Tax and some Dividend Tax.
The government website provides this useful example:
Say you receive £3,000 in dividends and earn £29,570 in wages in the 2024/25 tax year, totalling £32,570.
Subtract your Personal Allowance of £12,570, to leave a taxable income of £20,000.
This is in the basic-rate tax band, so you would pay:
- 20% tax on £17,000 of wages
- No tax on £500 of dividends
- 8.75% tax on £2,500 of dividends.
While dividends can be a good way to boost your income, recent tax increases and allowance reductions mean that you could face an unwelcome tax bill.
3 steps you can take to mitigate Dividend Tax rises and Dividend Allowance drops
1. Make full use of your ISA allowance
If you have high dividend paying investments that take you over the Dividend Allowance, you might consider reinvesting these into an ISA.
Stocks and Shares ISAs are tax-efficient, with any gains you make free of both Income Tax and Capital Gains Tax (CGT). There is, though, a limit to the amount you invest. For 2025/26, the annual ISA Allowance is £20,000.
2. Plan with your partner
The Dividend Allowance is individual to you, so if you have a spouse or a partner you can receive £1,000 a year in dividends between you without paying tax – but only if that £1,000 is evenly split. Plan between you how best to portion any assets that pay dividends to make sure you’re using your collective allowance effectively.
3. Invest in your pension
Depending on your reasons for investing, your pension could be a more tax-efficient place for your money.
You don’t pay CGT on any pension gains and the contributions you make are eligible for tax relief. You can contribute up to £60,000 (your Annual Allowance) to your pension tax-efficiently in the 2025/26 tax year.
However, be aware that you can’t usually access pension funds until you reach the age of 55 (rising to 57 in 2028).
Get in touch
If you’d like to talk to us about any aspect of investing, including Dividend Tax, please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.