How to beat the looming £1.34 billion dividend tax hike


The Government is cracking down on wealthier investors who have significant wealth outside of ISA and pensions, as well as company directors who pay themselves through dividends. The dividend tax regime has changed repeatedly over the past decade and investors have been subject to more and more squeezes on their income that have left them with far higher tax bills.

The latest change, in April, means that investors and the self-employed are expected to pay £1.34 billion more in tax next year* and each person will have to pay hundreds more in tax if they take substantial dividends from their investments. The dividend tax rate will increase by 1.25 percentage points, taking tax rates to 8.75% for basic-rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate payers.

At the same time the dividend tax-free allowance of £2,000 has been frozen for another year, rather than increased in-line with inflation, meaning a stealth tax increase. If it had been increased in line with RPI inflation since it was cut to £2,000 in 2019 the limit today would be £2,185. From April that would save basic-rate taxpayers £16 a year, higher-rate payers £62 a year and additional rate payers £73 a year.

The Government’s own estimates show that 40% of people with a dividend income outside an ISA will see a tax increase, and that 70% of the increase will be paid for by higher and additional-rate taxpayers. For example, an investor who has £10,000 in dividends will pay £100 more in tax, regardless of their tax bracket, while those with £30,000 of dividends will be hit with an extra £350 of tax, and anyone with £50,000 will pay an extra £600 a year in tax.

More about our Stocks and shares ISA

How much more you'll pay
Dividends received £2,000 £5,000 £10,000 £20,000 £30,000 £50,000
Dividend tax 2021 £0 £225 £600 £1,350 £2,100 £3,600
Dividend tax 2022 £0 £263 £700 £1,575 £2,450 £4,200
Difference £0 -£38 -£100 -£225 -£350 -£600

The increasing crackdown on investors:

The dividend tax regime has become far harsher for investors over recent years. The system was overhauled in 2016, when the dividend allowance of £5,000 was introduced but tax rates were increased. Following that, in 2019 the tax-free allowance was slashed to £2,000 and now rates have been hiked again.

A basic-rate taxpayer with £5,000 of dividends a year, assuming they’d used their personal allowance already, would have paid no tax on dividends until 2019 when they were hit with a £225 tax bill, which will rise to £263 from April. Those with sizeable taxable dividends have seen their tax bill rise dramatically, with a basic-rate taxpayer on £30,000 of dividends paying no tax in 2015 but £2,450 from April.

A higher-rate tax payer earning £30,000 in dividends will pay £1,950 more in tax from April than they did in 2015, £100 more than the increase seen by an additional-rate payer. Even at £10,000 of dividends a higher-rate taxpayer has seen a £200 hike in their tax bill, to £2,700 in April, while an additional-rate payer has only seen a £92 jump (to £3,148).

How dividend tax has changed over the years:

Date from Basic rate Higher rate Additional rate Dividend allowance
06-Apr-15 0% 25% 30.56% £0
06-Apr-16 7.5% 32.5% 38.1% £5,000
06-Apr-19 7.5% 32.5% 38.1% £2,000
06-Apr-22 8.75% 33.75% 39.35% £2,000

How to beat the hike:

The dividend tax increase will hit either those who have exceeded the ISA allowance each year and so saved the excess in a dealing account, or those who have historical wealth that they never got around to putting into an ISA.

While the ISA allowance now is a very generous £20,000 it hasn’t always been that way – just over 10 years ago it was £7,200 and only in 2017 did it leap to the current high limit. This means it’s very possible that people would have built up other investments and, coupled with investment growth, could now have a sizeable pot outside an ISA.

But there are ways to beat the tax hike. One way is to move money into your ISA or pension. By using this year’s ISA allowance and immediately using next year’s at the start of the new tax year in April, you can shelter £40,000 from the taxman before the dividend hike bites. If you’re a couple and both haven’t used your allowances you can move £80,000 in before the tax rise comes in.

But rather than moving any assets into the ISA, investors may wish to consider prioritising income-paying investments as they are the ones that will be hit by dividend tax. So, investors should rank their investments from the highest dividend paying to the lowest, in pounds and pence, rather than percentage terms. Then they may want to work through the list, shifting the highest yielding investments into the ISA first that may help to cut their tax bill.

*Source: Autumn Budget and Spending Review 2021 Policy Costings -

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change. Pensions and ISA rules apply.

These articles are for information purposes only and are not a personal recommendation or advice.

ajbell_laura_suter's picture
Written by:
Laura Suter

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.