How to keep your dividends safe from the taxman

Almost 3.9 million people are expected to pay tax on dividend income this year – more than double the amount four years ago.

The number of taxpayers paying dividend tax has surged in recent years due to cuts to the tax-free annual allowance.

The allowance was slashed from £2,000 to £1,000 in April 2023, and then halved again to £500 in April 2024/25, where it has remained since.

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In 2026/27, 3.88 million people will pay dividend tax, according to Freedom of Information (FOI) figures obtained from HMRC by investment platform AJ Bell, a rise from 1.9 million 2022/23.

This includes almost 1.7 million higher and additional rate taxpayers, up from roughly 750,000 in 2022/23.

In a double sting, basic and higher rate taxpayers have seen a hike in dividend tax rates in 2026/27.

Furthermore, income tax thresholds will remain frozen until at least 2031, as confirmed in the 2025 Autumn Budget, which will likely drag some investors into paying higher rates of dividend tax in the future.

Sarah Coles, head of personal finance at AJ Bell, said: “The dividend tax attack has walloped investors over the past few years, with pensioners and average earners hit particularly hard. To make matters worse, there’s no let-up in the coming year, as investors face even more pain from the latest dividend tax hike.”

Luckily, there are ways to avoid tax on your dividends, such as making the most of your ISA allowances and using a pension.

We look at how dividend tax works, and reveal five tips to help you beat the dividend tax trap.

How does dividend tax work?

You do not pay tax on any dividend income that falls within your personal allowance (which is £12,570).

You also get a dividend allowance each year. This is worth £500 for 2026/27. You only pay tax on any dividend income above the dividend allowance.

The tax rate you pay depends on your income tax band:

• Basic rate - 10.75%
• Higher rate - 35.75%
• Additional rate - 39.35%

To work out your tax band, add your dividend income to your other income. You may pay tax at more than one rate.

If your dividends are within the dividend allowance for the tax year, you do not need to tell HMRC.

However, if your dividend income exceeds the allowance, and if you are paying tax on up to £10,000 of dividends, you need to tell HMRC but you don't need to fill in a tax return, unless you already complete one. Instead, you can call HMRC or ask them to change your tax code.

If you're paying tax on more than £10,000 in dividends, you’ll need to file in a self-assessment tax return. If you do not usually send a tax return, you need to register by 5 October following the tax year you had the income.

How to protect your income

There are several ways to avoid falling into the dividend tax trap – here are five tips to consider.

1. Use your stocks and shares ISA

Your first port of call for avoiding dividend tax should probably be a stocks and shares ISA.

Dividends paid on investments held in ISAs are free from income tax and don’t take up any of your £500 tax-free dividend allowance.

Coles said: “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.”

You can put up to £20,000 into an ISA each tax year and buy investments like funds and shares within it.

Or you can carry out a Bed and ISA transfer, which moves existing investments into an ISA, by selling them and buying them back within an ISA wrapper, up to the overall limit of £20,000 each tax year.

Doing a Bed and ISA could save you £15,000 in tax over a decade, according to research by Vanguard.

This process does crystallise any gains you’ve made on those investments which will count towards your capital gains tax (CGT) allowance (£3,000) and could result in a CGT charge if your profits exceed this amount.

2. Protect with a pension

Pensions, such as self-invested personal pensions (SIPPs), are another way to protect your dividends from the taxman.

SIPPs qualify for the same upfront tax breaks as other pensions, but they come with more flexibility as you can usually pick and choose from a wide range of investments.

They are less flexible than ISAs because you can’t access your money until you hit age 55 (rising to 57 from 2028). However, dividends in a pension can accumulate in the pension without being subject to tax, and like in an ISA, they don’t take up any of your £500 dividend allowance.

As with an ISA, you can do a ‘Bed and SIPP’ to move investments from a taxable account into a tax-sheltered one. Again, this potentially raises a CGT liability if your gains exceed the £3,000 CGT allowance.

3. Transfer assets to your partner

You can reduce taxable income by transferring assets from one spouse or civil partner to another.

This can reduce tax liabilities where one partner isn’t using their dividend allowance, has some free ISA allowance to shelter the shares, or simply sits in a lower tax band and so will be subject to less tax on dividends above the allowance.

This effectively allows you to “maximise two sets of allowances, such as two sets of dividend allowance, and ensure assets liable for tax are held by the partner subject to lower rates of tax”, said David Little, financial planning partner at wealth manager Evelyn Partners.

4. Park your money in Junior ISAs

If you plan on putting money away for your children, consider putting it into a Junior ISA, which comes with a £9,000 annual tax-free allowance per child.

With a stocks and shares Junior ISA, you won’t pay tax on any capital gains or dividends received.

Just bear in mind, the child won’t be able to access their money until they become an adult, after which it’s up to them what they do with it.

Little said: “The funds will only be accessible by the child when they turn 18 so this must be money you were planning to give to your child anyhow.”

5. Consider a VCT

Buying venture capital trusts (VCTs) at issue means any dividends you receive from the underlying investments are free from dividend tax.

However, bear in mind that VCTs invest in very early-stage companies and come with a high level of risk and limited liquidity.

For this reason, they are generally better suited to more adventurous investors who have already maxed out on ISAs and pensions.

You can however get 20% tax relief on up to £200,000 invested, though you must hold the VCT for at least five years to keep the relief.