How does dividend tax work? Managing your tax liability effectively could help reduce your overall bill and make the most of your income. If you’re unsure when and how you might pay dividend tax, this guide is here to help.
A dividend is a common way for a company to distribute profits to its shareholders. You may receive dividends if you own shares in dividend-paying companies, or if you’re a business owner paying yourself through dividends.
In recent years, changes to tax rules mean more people than ever are now required to pay dividend tax.
For example, the amount you can receive in dividends before tax is known as the dividend allowance. This has gradually fallen from £5,000 in the 2017/18 tax year to just £500 in 2024/25.
According to a September 2024 FTAdviser article, the number of people paying Dividend Tax for the 2024/25 tax year is expected to double when compared to 2021/22. It’s estimated that almost 3.6 million people will need to pay Dividend Tax for the 2024/25 tax year, leading to the Treasury collecting almost £18 billion.
With more people affected than ever, understanding how dividend tax works and how the current rules might impact you has become increasingly important, especially if you’re looking for ways to reduce your liability.
The Dividend Tax essentials you need to know
If you receive dividends, it’s important to understand when dividend tax may be due and what rate you’ll pay.
As mentioned earlier, you won’t pay dividend tax if the total amount you receive is below the dividend allowance. For the 2025/26 tax year, the allowance remains at £500.
Any dividends above this threshold are usually taxable. The rate you’ll pay depends on which income tax band(s) your dividends fall into once your other income such as salary, savings, or rental income — is taken into account.
For the 2025/26 tax year, Dividend Tax rates are:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Depending on your circumstances, paying dividend tax on income could help reduce your overall tax bill. For instance, if you’re a business owner, you might choose to lower your salary and take part of your income as dividends, potentially resulting in a lower overall tax rate.
Understanding tax rules and how they apply to your personal situation can be complex, so seeking tailored financial advice may be beneficial.
4 effective ways to reduce your Dividend Tax bill
1. Use your Dividend Allowance
One of the simplest ways to reduce your dividend tax bill is to make full use of your dividend allowance.
The allowance resets at the start of each tax year. If possible, spreading dividend payments over multiple tax years could help lower the amount of tax you pay.
The dividend allowance is applied to individuals, not households. So, if you’re married or in a civil partnership, you might benefit from managing your tax liability together. For example, transferring some dividend-paying assets to your partner could allow you both to make use of your allowances.
2. Place dividend-paying shares in a tax-efficient wrapper
A stocks and shares ISA is a popular option. You won’t pay tax on dividends from shares held within an ISA, and any investment returns are also free from capital gains tax (CGT).
As a result, moving investments to an ISA could be an efficient way to reduce your tax bill.
You should note that the ISA subscription limit caps how much you can place into adult ISAs each tax year. For the 2025/26 tax year, it is £20,000.
In addition, pensions are a tax-efficient way to invest for retirement. Again, dividends you receive from investments held in a pension will not be liable for Dividend Tax, and investment returns won’t be liable for CGT.
The Annual Allowance (the amount you can save into a pension each tax year before tax charges may be applied) is £60,000 in 2025/26. However, your Annual Allowance might be lower if you’re a high earner or have already taken an income from your pension.
Keep in mind that you usually can’t access the money held in your pension until you are 55 (rising to 57 in 2028).
3. Reduce the number of dividend-paying shares you hold
Depending on your investment objectives, you may choose to reduce the number of dividend-paying shares in your portfolio, particularly if you’re aiming for long-term growth rather than regular income.
However, this approach won’t suit everyone. In some cases, shifting your focus away from dividend income could increase your tax liability in other areas, such as capital gains tax (CGT).
A financial planner can help you review your goals and assess whether adjusting your investment strategy is right for your circumstances.
4. Consider premium bonds for tax-free returns
Premium Bonds, offered by NS&I, allow you to earn tax-free prizes instead of interest or dividends. While they don’t pay a guaranteed income, any winnings are completely free from income tax including dividend tax.
They can be a useful option if you’ve already used your dividend allowance or want to avoid taxable investment income. However, returns are not guaranteed so they may not be suitable for those seeking steady income or long-term growth.
Get in touch to talk about reducing your tax liability
If you’d like to discuss your tax liability and the steps you might take to reduce it, please get in touch. We’ll work with you to create a tailored plan that suits your circumstances and goals.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax planning.
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