5 ways to keep your money efficient after changes to the Dividend Tax rate

If you have dividends you rely on for income, it’s important to factor in any rate changes to your financial planning.

The start of the current tax year saw increases in the basic rate and higher rate, while the additional rate remained the same.

The new rates are:

The basic rate has increased to 10.75% (from 8.75%).
The higher rate has increased to 35.75% (from 33.75%).
The additional rate remains unchanged at 39.35%.
The Dividend Allowance also remains the same at £500.

So, with the new rates likely to affect your dividend income up to the additional rate, it’s a good idea to ensure your financial plan is still working as efficiently as possible for you.

Read on to discover five ways you can keep your money efficient in light of the recent changes.

1. Maximise your Stocks and Shares ISA

A good starting point for reducing Dividend Tax is to make full use of your Stocks and Shares ISA. Any dividends from investments held within an ISA are free from Income Tax and don’t count towards your £500 dividend allowance.

You can invest up to £20,000 each tax year across your ISAs, and you can invest in a Stocks and Shares ISA either by adding cash or buying investments within the wrapper.

You can also now move money between your ISA accounts, meaning you could rebalance your existing ISAs from cash into investments.

If you have existing investments outside of an ISA and you haven’t used your full allowance, you could also use a ‘Bed and ISA’ strategy. This involves selling existing investments and then buying them again inside an ISA, effectively moving them into a tax-efficient environment. However, it’s important to consider any Capital Gains Tax (CGT) implications this could have, so it’s a good idea to speak to a financial planner before adjusting your ISAs.

Moreover, if you have used your full ISA allowance and want to keep your wealth efficient while supporting your younger generations, you could also invest in a Junior ISA (JISA). You can invest up to £9,000 per child each year into JISAs, making it a great way to support their future while mitigating Dividend Tax.

2. Make additional pension contributions

Making additional pension contributions is another effective way to protect your wealth from Dividend Tax.

Any returns generated within a pension grow free from tax, and contributions come with the added benefit of tax relief, which can further boost their efficiency.

As with ISAs, you can also use a ‘Bed and SIPP’ strategy. This involves selling investments held outside of a pension and buying them again within your SIPP. Like the ‘Bed and ISA’, this can be a good way to shelter your portfolio from Dividend Tax, though again, it’s important to factor in any CGT liability this may incur.

Because you can’t access the money held in your pensions until you’re 55 (rising to 57 from 2028), they’re generally less flexible than ISAs, but they can be very effective for building your long-term wealth tax-efficiently.

3. Transfer assets to your partner

If you’re married or in a civil partnership, transferring investments between partners can be a simple way to reduce Dividend Tax, among others.

If one partner isn’t fully using their dividend allowance, has spare ISA capacity, or falls into a lower tax band, moving investments into their name can lower the overall tax paid on dividends. This can be particularly useful if one partner’s dividend income is pushing them into a higher tax band.

Moreover, transfers between partners are also typically free from CGT. So, by strategically transferring assets, you and your partner can maximise both your allowances and bring down your overall tax liability.

4. Consider investing in Venture Capital Trusts

Another option to consider is Venture Capital Trusts (VCTs).

A VCT is a scheme designed to encourage individuals to invest in small, early-stage, UK-listed companies with the potential for high growth.

When you invest in a VCT, any dividends you receive are free from Dividend Tax, which can be useful if you’ve already used your ISA and pension allowances. You also receive upfront Income Tax relief of 20%, though you’ll need to hold the VCT for at least five years to retain that relief.

However, VCTs come with a higher level of risk, and they’re usually best suited to investors who are comfortable taking on risk and have already made full use of other tax-efficient wrappers. As such, it’s a good idea to speak to a financial planner before deciding to invest in VCTs.

5. Speak to a financial planner

While each of these strategies can be effective on its own, it’s important to understand how they can come together in a way that suits your wider financial plan.

Dividend Tax is linked with your Income Tax position, CGT, pension planning, and long-term goals, so what works well for one person may not be the best for another.

A financial planner can help you:

Structure your investments in a way that makes full use of available allowances
Decide which wrappers to use and when
Be alert to and manage any taxes you’re liable to if you rebalance or move assets
Ensure your income remains sustainable while staying as tax-efficient as possible.

With the right planning in place, you can reduce unnecessary tax and make sure more of your returns stay working for you.

To speak to a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

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.

The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.