Ten tips to beat the dividend tax rise

9th July 2015


The Chancellor expects to collect £2.5 billion in additional tax in the 12 months from April 2016 from his new dividend taxation plan.

Hargreaves Lansdown, the adviser has set out how it thinks dividend taxation will change and how investors can avoid the potential of additional tax pain.

How it works (from April 2016):

All taxpayers will have a tax-free Dividend Allowance of £5,000 a year. After this, the rate of tax payable on dividends will depend upon your other taxable income. If your dividend income takes you from one income tax band into the next, you will then pay the higher dividend rate on that portion of income. The tables below compare this tax year with next.

Essentially, once you start to pay tax on dividends, the personal tax liability for taxpayers increases by 7.5%.

Dividend tax rates 2015/16

Non-taxpayers 0%

Basic rate taxpayer 0%

Higher rate taxpayers 25%

Additional rate taxpayers 30.6%

Dividend tax rates 2016/17

Non-taxpayers 0%

Basic rate taxpayer 7.5%

Higher rate taxpayers 32.5%

Additional rate taxpayer 38.1%

(Tax rates based on the actual dividend received.)

Danny Cox, chartered financial planner, Hargreaves Lansdown, says: “The new dividend taxation rules are definitely simpler but are also costly for some. Investors need to navigate their way around the new rules carefully to avoid tax rises. Apathy is the investor’s enemy and people should fully use their tax shelters such as an ISA, even if they think their income or gains will currently fall within tax-free allowances. You just never know when things might change in the future so it’s best to bank your tax breaks while you still can.”

With the FTSE All-share yielding 3.49%, a typical portfolio of more than around £140,000 will start to suffer dividend taxation.

2015/2016 tax year Net dividend Tax credit Additional tax Div after all tax Gross dividend
Non-taxpayer  £            1,000.00  £                 111  £                    –  £              1,000  £            1,111.11
Basic rate taxpayer  £            1,000.00  £                 111  £                    –  £              1,000  £            1,111.11
Higher rate taxpayer  £            1,000.00  £                 111  £                250  £                  750  £            1,111.11 22.50%
Additional rate taxpayer  £            1,000.00  £                 111  £                306  £                  694  £            1,111.11 27.50%


2016/2017 tax year
Annual tax-free allowance £5,000
Gross dividend Tax credit Tax due Div after all tax
Non-taxpayer  £            1,000.00  £                     –  £                    –  £              1,000
Basic rate taxpayer  £            1,000.00  £                     –  £                  75  £                  925 7.50%
Higher rate taxpayer  £            1,000.00  £                     –  £                325  £                  675 32.50%
Additional rate taxpayer  £            1,000.00  £                     –  £                381  £                  619 38.10%

It is expected that dividends will all be paid “gross” and tax liabilities assessed and paid through self-assessment.

Ten tips to save on dividend tax rises:

1. Maximise your annual tax-free Dividend Allowance

Each person will be entitled to a new tax-free Dividend Allowance of £5,000 per annum. Married couples (and registered civil partners) should spread their taxable portfolios between them to make full use of each person’s allowance.

2. Make the most of each spouse’s income tax allowance and tax bands

Married couples should make full use of personal allowances and basic rate tax bands, where applicable, so that taxable dividends are paid in the name of the spouse who pays the lowest tax rates.

3. ISA

Taxpayers will see a tax increase of 7.5% on dividend income received above £5,000 a year. This makes sheltering taxable investments in an ISA all the more important as unlimited dividends can be withdrawn from an ISA tax-free. There is also no capital gains tax to pay in an ISA. £15,240 worth of existing investments can be sheltered in an ISA in this tax year.


SIPPs also have the benefit of tax free dividends. For retirement savings where money is not needed until age 55 the tax benefits of SIPPs are highly compelling. Most people can invest up to 100% of earnings effectively capped at £40,000 in this tax year and receive tax relief up to 45%.

5. Be clever with yield

It’s good practice to use your ISA allowance. However, where you have already done so, be clever with yield. A diverse portfolio will have shares and funds which generate different levels of dividend income yield. Shelter those which generate the higher yields in an ISA to maximise the dividend income tax allowance.

For example, a taxable portfolio of £125,000 with a yield of 4% will generate £5,000 a year and use up the Dividend Allowance. However a portfolio of £500,000 yielding 1% generates the same £5,000 a year. Shelter higher yielding funds and shares in ISA.

6. Use the new personal savings allowance for corporate bonds


In most cases, the income from fixed interest funds and corporate bonds is subject to interest tax, not dividend tax. From April 2016, the first £1,000 of interest income from these holdings will be free of income tax under the new personal savings allowance (£500 for higher rate taxpayers). This provides the opportunity for tax-free income in addition to the dividend allowance and ISA income.

It’s important to note that the personal savings allowance also applies to taxable cash interest, so it’s important to ensure you don’t exceed £1,000 a year (£500 for higher rate taxpayers).

7. Reduce other income

After the new Dividend Allowance, dividend tax is linked to the rate of income tax you pay. Therefore reducing your other taxable income could also reduce the amount of dividend tax paid. In some cases taxable income for a particular year could be reduced – perhaps by transferring income bearing assets such as cash deposits to a lower earning spouse, or deferring withdrawals from a drawdown pension until a new tax year.

8. Use pension to save dividend tax

A pension contribution can also be used to reduce dividend tax liabilities for many investors by taking advantage of the tax relief on the contribution. Effectively the basic rate tax band is increased by the amount of the pension contribution, meaning larger gains might be realised before the higher rate of dividend tax is payable. For example, a pension contribution of £3,600 will extend the basic rate tax band from £43,000 to £46,600 (2016/17 tax year). Then, providing other taxable income and taxable dividend income total less than £44,600 in this tax year, the dividend tax will be paid at 7.5% and none at 32.50%.

 9. Invest in VCTs

For taxpaying, sophisticated investors, happy to take higher risks, Venture Capital Trusts (VCTs) generate tax-free dividends. These tax-free dividends will be payable in addition to tax-free dividends from an ISA and tax-free dividends within the new £5,000 Dividend Allowance.

 10. Defer taxation using an offshore investment bond

Dividend income within an offshore investment bond grows almost free of taxation (there may be a small amount of withholding tax). Investors only pay tax when profits are withdrawn. Furthermore withdrawals of up to 5% of the original capital a year can be taken without immediate tax charge.

Dividend income can therefore be deferred and timed to when lower rates of tax might be paid. For example, a higher rate taxpayer will pay 32.50% dividend tax after the Dividend Allowance, whereas if deferred until the investor is a basic rate taxpayer, withdrawals from an offshore investment bond would be taxed at 20%.

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