4 smart ways to manage the upcoming Dividend Tax rise

Upcoming increases to Dividend Tax mark another change on the dividend landscape for investors.

Just over a decade ago, notional charges were in place for basic-rate taxpayers, with higher- and additional-rate taxpayers liable for a percentage fee on their net dividend.

However, years of rapidly reducing allowances and increases in Dividend Tax rates have meant many investors face much higher bills.

A further rate increase is coming on 6 April 2026. Discover what this could mean for you and four ways you could reduce your bill.

A decade of changes has meant higher tax rates and lower thresholds for dividend earners

If you hold any of your investments as shares, then it’s likely you’ll be paid any returns as dividends, either quarterly or annually. Irrespective of whether you take these dividends as income, or have them reinvested, they are subject to Dividend Tax.

And in yet another announcement on dividends, in the Autumn 2025 Budget, the chancellor announced there would be further hikes to Dividend Tax.

Under the new rules:

• • The basic rate will rise from 8.75% to 10.75%.
  • The higher rate will increase from 33.75% to 35.75%.
  • The additional rate will remain at 39.35%.

The Dividend Allowance remains at £500, meaning dividends above this amount are taxable. This threshold was reduced from £2,000 to £1,000 in April 2023 and further decreased to £500 in April 2024.

According to IFA Magazine, a basic-rate taxpayer could pay £500 a year more in Dividend Tax by 2029/30.

Let’s use an example to show how Dividend Tax has changed over time. For simplicity, we’ll just look at dividend income.

In 2022/23:

• • Dividend income: £30,000
  • Personal Allowance £12,570
  • Income falls within the basic rate.

Step 1: Personal Allowance

£30,000 – £12,570 = £17,430

Step 2: Dividend Allowance

£17,430 – £2,000 = £15,430 taxable

Step 3: Tax

£15,430 ÷ 100 × 8.75% = £1,350

The same dividend income in 2026/27:

Step 1: Personal Allowance

£30,000 – £12,570 = £17,430

Step 2: Dividend Allowance

£17,430 – £500 = £16,930 taxable

Step 3: Tax

£16,930 × 10.75% = £1,820

As you can see, the new figure shows an almost £500 increase for a basic-rate taxpayer.

4 ways to reduce your Dividend Tax liability

If you have investments which pay you dividends, there are some approaches you could adopt to potentially reduce your Dividend Tax bill.

1. Use ISAs

If your investments are within an ISA, then you usually won’t pay tax on dividend income.

You can pay up to £20,000 into your ISAs each year. While the full allowance isn’t changing, from April 2027, you can only pay up to £12,000 into a Cash ISA if you’re under 65, with the remaining £8,000 reserved for Stocks and Shares ISAs. However, if you’re over 65, this rule won’t apply.

2. Adopt the “Bed and ISA” approach

It might have a rather strange name, but Bed and ISA is a clever way to navigate Dividend Tax. Under this system, if you have investments in a taxable account, then you can sell them and immediately buy them back within the shelter of a Stocks and Shares ISA.

You won’t pay Dividend Tax or Capital Gains Tax (CGT) on future profits, but be aware you might need to pay CGT on profits to date when you sell.

This is also an effective way of optimising your annual ISA allowance.

3. Pay into your pension

Shifting funds into your workplace pension or self-invested personal pension (SIPP) is another way to protect your dividends. Your dividends can grow within the pension wrapper without being subject to Dividend Tax or taking up any of your Dividend Allowance.

However, pensions are less accessible than ISAs, as you can’t access any of these funds until you reach the age of 55 (rising to 57 from April 2028).

4. Use your partner’s allowances

If you’re married or in a civil partnership, you can transfer some of your investments to your partner. This can be effective if they aren’t already using their Dividend Allowance or have some spare ISA allowance they can use. You can also pay into each other’s pensions, within certain limits.

Alternatively, they may be in a lower tax band, which in turn could reduce the tax bill.

Get in touch

If you think the new Dividend Tax rates could impact you, please talk to us, and we can look at your options. Please email us at info@harperlees.co.uk or call 01277 350560 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate tax planning.