How dividend tax works: The rates you pay and how to cut it
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A dividend is basically a reward for holding stock, and you can receive it in cash or reinvest it in more of the stock
Many investors depend on income from dividends. It can yield nice returns, especially if you keep reinvesting them in more stocks.
A dividend is basically a reward for holding stock, paid out based on how much of a particular stock you own.
This payout occurs at intervals chosen by the company, such as monthly, quarterly, biennially or annually, and you can choose to receive it in cash or reinvest it in more of the shares.
However, the government inevitably wants its share of this wealth, and in recent years has been hacking allowances and taking more and more dividend tax from investors.
The wealthiest investors and small business owners, who often choose to pay themselves out through dividends, are the most heavily taxed.
But the increasingly strict regime means it also takes a growing toll on lower-income individual shareholders who hold investments outside of Isas and pensions.
Below we look at the rules and how you can protect yourself against dividend tax.
How much is dividend tax?
The tax-free allowance for dividend income in the current tax year is £2,000, but Chancellor Jeremy Hunt announced in his autumn statement last year that it will be reduced to £1,000 in April and again to £500 from April 2024.
If your dividend income exceeds your personal allowance – which also takes into account all your other taxable income – plus your tax-free dividend payment, you pay dividend tax according to your income tax bracket.
Dividend tax rates are currently 8.75 percent for base rate payers, 33.75 percent for higher rate payers and 39.35 percent for additional rate payers.
The rates have been increased from April 2021 from 7.5 percent, 32.5 percent and 38.1 percent.
As noted by financial experts at the time, because the 1.25 percent increase was imposed across the board, regardless of the income tax bracket, this change fell more heavily on shareholders who were base rate taxpayers.
Former Chancellor Kwasi Kwarteng announced in his ill-fated mini-budget that the 1.25 percent rate hike would be reversed from April 2023, but Hunt quickly abandoned that idea last fall.
As for the dividend payout, it was introduced at £5,000 but saw a drastic cut of 60 per cent in 2018 and, as mentioned above, will be shredded to just £500 a year in Spring 2024.
It is worth noting that the pre-April 2016 regime was generous to lower income or basic rate taxpayers, due to a ‘fictitious tax credit’ which effectively meant they paid zero dividend tax.
Meanwhile, under that old system, higher taxpayers paid only 25 percent dividend tax.
The £5,000 grant was initially put in to compensate people for losing this valuable benefit and was mainly aimed at personal investors.
The government explains more about dividend tax on its website, including how to pay for it.
When you sell your shares, you may also have to pay taxes – read our guide to capital gains tax here.
How you can protect yourself against dividend tax
Use your Isa allowance of up to £20,000 per annum by converting your investments into the tax-free pack of shares and shares of Isa.
This can be done by selling and buying back your investments in a process known as a Bed & Isa.
Couples can also transfer tax-free assets between them to make the most of this.
Financial experts suggest that you might look into prioritizing high-dividend investments when deciding which one to switch to your Isa.
However, if you keep growth stocks out of your Isa, you’ll also need to account for capital gains tax. You may want to seek professional advice on the best way to go about this.
A looming capital gains tax assessment from April 6 will also reduce the annual tax-free allowance from £12,300 to £6,000. Those who have accumulated significant investment gains outside of an Isa may want to consider selling now to bank some profit while the larger capital gains tax deduction is still in effect.
You can also invest more through your retirement, where the contribution is supplemented with tax relief from the government and your investments can grow tax-free. But in a pension, your money is tied up until you’re 55, rising to 57 in 2028, and any withdrawal above a tax-free amount of 25 percent is subject to income tax.
Compare the best DIY investment platforms and stocks Isa
Online investing is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investment platform, stock Isa or a general investment account, the range of options seems overwhelming.
Each provider has a slightly different offering, charging more or less fees for trading or holding stocks and giving access to a different range of stocks, funds, and mutual funds.
When weighing up the right one for you, it’s important to look at the service it offers, along with handling fees and transaction fees, plus any other additional fees.
To help you compare investment accounts, we’ve put together the facts and put together a comprehensive guide to choosing the best and cheapest investment account for you.
We highlight the key players in the table below, but we encourage you to do your own research and consider the points in our full guide linked here.
>> This is Money’s full guide to the best investment platforms and ISAs
The platforms below have been independently selected by This is Money’s specialist journalists. If you open an account through links marked with an asterisk, This is Money earns an affiliate commission. We will not allow this to affect our editorial independence.
| Management fees | Loads notes | Fund trading | Default share, trust, ETF trading | Invest regularly | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ call* | 0.25% | Max £3.50 per month for stocks, trusts, ETFs. | £1.50 | £9.95 | £1.50 | € 1.50 each | More detail |
| Bestinvest* | 0.40% (0.2% for pre-built portfolios) | Account fees reduced to 0.2% for turnkey investments | Free | £4.95 | Free for funds | Free for income funds | More detail |
| Charles Stanley directly | 0.35% | No share platform fees on any transaction in that month and an annual cap of £240 | Free | £11.50 | na | na | More detail |
| Fidelity* | 0.35% on funds | £45 fee up to £7,500. Max £45 per annum for stocks, trusts, ETFs | Free | £10 | Free funds £1.50 shares, relies on ETFs | £1.50 | More detail |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for stocks, trusts, ETFs | Free | £11.95 | £1.50 | 1% (£1 min, £10 max) | More detail |
| Interactive investor* | £9.99 per month, or £4.99 under £30,000, £12.99 for Sipp | £5.99 a month back in free trade credit (does not apply to a £4.99 subscription) | £5.99 | £5.99 | Free | £0.99 | More detail |
| iWeb | £100 one-off | £5 | £5 | na | 2%, up to £5 | More detail | |
| Etoro* | Free but no Isa or Sipp | Investment account offers stocks and ETFs. Beware of high risk CFDs on a trading account | Not available | Free | na | na | More detail |
| Free trade* | Free for Basic account, £4.99 per month for Standard with Isa | Freetrade Plus with more investment and Sipp is £9.99/month inc. Is a fee | No funds | Free | na | na | More detail |
| Forefront | 0.15% | Only Vanguard Funds | Free | Free Vanguard ETFs only | Free | na | More detail |
| (Source: ThisisMoney.co.uk Jan 2023. Administration fees may be levied monthly or quarterly | |||||||
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