Investors could find themselves paying higher taxes when new dividend tax rates come into force from 6 April 2026. But there is a simple way to avoid the increase by making use of tax efficiency investing products.
As announced in last year’s Budget, some investors will see a two-percentage-point increase in the rate of tax they pay on dividends earned from shares and funds invested in shares, including investment trusts and ETFs.
Changes to dividend tax
Currently, basic-rate taxpayers pay 8.75%, higher-rate taxpayers 33.75% and additional-rate taxpayers 39.35% on dividends that exceed the annual tax-free allowance of £500. From 6 April, these rates will rise to 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers. The rate for additional-rate taxpayers will stay at 39.35% while non taxpayers will pay no tax.
Dividend income is subject to the following tax rates:
- 10.75% (up to £50,270), from 8.75%
- 35.75% (between £50,271 and £125,140), from 33.75%
- 39.35% (above £125,140), remains the same
- Tax allowance of £500 remains the same
Only investors receiving dividends outside tax-efficient wrappers, such as ISAs or pensions, are subject to dividend tax. For example, a basic-rate taxpayer investing in a general account and earning £1,000 in dividends will currently pay £44 in dividend tax. This would increase to £54 under the new rates. Meanwhile, a higher-rate taxpayer investing in a general account and earning £2,000 of dividends will currently pay £506 in dividend tax. Once the new rates are implemented, this would rise to £536.
How an ISA can kill your tax bill
Experts suggest making use of ISA allowances (currently £20,000 a year) or considering extracting dividends before April 6, 2026, to avoid higher rates.
When you invest through an ISA, any income you receive – from dividends or interest – is tax free. This could have a meaningful impact on your overall balance, particularly if tax rates continue to rise.
What’s more, any gains made inside an ISA are completely free from capital gains tax (CGT), offering a double layer of protection.
You can currently invest up to £20,000 each tax year across your ISAs. That means you have until 5 April to use up your full limit.
If you hold investments in a general account and haven’t used up your ISA allowance for the year – and have no plans to do so with ‘new’ money – you can sell those investments and reinvest them in an ISA.
This process is called ‘bed and ISA’. When you initially sell your investments, you’ll be liable to CGT on profits that exceed your CGT allowance (currently £3,000). However, once your investments are inside the ISA wrapper, all future returns are sheltered from tax.
Dividends still crucial
Are dividends still important? The short answer is yes, according to tax experts at accountancy firm Rickard Luckin.
Even with the planned dividend tax increases from April 2026, taking dividends alongside any salary or other pension income generally remains more tax-efficient than taking just a salary/pension, ‘it’s just slightly less beneficial than previously.’
The main advantage is that you do not pay National Insurance on dividends.
If you don’t use Self-Assessment, you must inform HMRC if you receive over £500 in dividends to have your tax code adjusted.
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