A dividend is basically a reward for holding shares, and you can receive it in cash or reinvest it in more of the stock
Many investors rely on income from dividends. It can bring great returns, particularly if you keep reinvesting them in more shares.
A dividend is basically a reward for holding shares, paid out according to how much of a particular stock you hold.
This payout will be made at intervals chosen by the company, such as monthly, quarterly, bi-annually 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 it has hacked back allowances and grabbed increasing amounts of dividend tax from investors in recent years.
The wealthiest investors and small business owners, who often choose to pay themselves via dividends, are clobbered most by dividend tax.
But the increasingly stingy regime means it is also taking an ever greater toll on lower-income individual shareholders holding investments outside Isas and pensions.
We look at the rules and how to protect yourself from dividend tax below.
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 slashed to £1,000 this April, and then again to £500 from April 2024.
If your dividend income is higher than your personal allowance – which takes into account all your other taxable income too – plus your tax-free dividend allowance, you will pay dividend tax according to your income tax band.
Dividend tax rates are currently 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers.
The rates were increased from 7.5 per cent, 32.5 per cent and 38.1 per cent from April 2021 onward.
As pointed out by financial experts at the time, because the 1.25 per cent rise was imposed across the board regardless of income tax bracket, this change fell more heavily on shareholders who were basic rate taxpayers.
Former Chancellor Kwasi Kwarteng announced in his ill-fated mini-Budget that the 1.25 per cent rate hike would be reversed from April 2023, but Hunt swiftly dropped that idea again last Autumn.
Turning to the dividend allowance, this was introduced at £5,000 but saw a drastic 60 per cent cut in 2018 and as noted above is about to be shredded to just £500 a year by spring 2024.
It is worth noting that the pre-April 2016 regime was more generous to lower income, or basic rate taxpayers, due to a ‘notional tax credit’ which effectively meant they paid zero dividend tax.
Meanwhile, under that old system, higher rate taxpayers only paid 25 per cent dividend tax.
The £5,000 allowance was initially brought in to compensate people for losing this valuable perk and was chiefly aimed at personal investors.
The Government explains more about dividend tax on its website, including how to pay it.
When you sell your shares, you might have to pay tax then too – read our guide to capital gains tax here.
How to protect yourself from dividend tax
Use up your Isa allowance of up to £20,000 a year by switching your investments into the tax-free wrapper of a stocks and shares Isa.
This can be done by selling your investments and buying them back in a process known as a Bed & Isa.
Couples can also transfer assets between them tax-free to make the most of this.
Financial experts suggest you might look at prioritising high dividend paying investments when deciding which to switch into your Isa.
However, if you keep growth stocks outside your Isa you need to consider capital gains tax as well. You might want to take professional advice on the best way to handle this.
A looming capital gains tax raid from 6 April will also slash the annual tax-free allowance from £12,300 to £6,000. Those who have built up substantial investment profits outside of an Isa may want to consider selling now to bank some profits while the larger capital gains tax allowance is still in place.
You can also invest more via your pension, where contributions are topped up by tax relief from the Government and your investments can grow tax-free. But in a pension your money is locked up until you are 55, rising to 57 in 2028, and any withdrawals beyond a 25 per cent tax-free lump sum are subject to income tax.
Compare the best DIY investing platforms and stocks & shares Isa
Investing online 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 investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
>> This is Money’s full guide to the best investing platforms and Isas
Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
| Admin charge | Charges notes | Fund dealing | Standard share, trust, ETF dealing | Regular investing | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ Bell* | 0.25% | Max £3.50 per month for shares, trusts, ETFs. | £1.50 | £9.95 | £1.50 | £1.50 per deal | More details |
| Bestinvest* | 0.40% (0.2% for ready made portfolios) | Account fee cut to 0.2% for ready made investments | Free | £4.95 | Free for funds | Free for income funds | More details |
| Charles Stanley Direct | 0.35% | No platform fee on shares if a trade in that month and annual max of £240 | Free | £11.50 | n/a | n/a | More details |
| Fidelity* | 0.35% on funds | £45 fee up to £7,500. Max £45 per year for shares, trusts, ETFs | Free | £10 | Free funds £1.50 shares, trusts ETFs | £1.50 | More details |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for shares, trusts, ETFs | Free | £11.95 | £1.50 | 1% (£1 min, £10 max) | More details |
| Interactive Investor* | £9.99 per month, or £4.99 under £30k holdings, £12.99 for Sipp | £5.99 per month back in free trading credit (does not apply to £4.99 plan) | £5.99 | £5.99 | Free | £0.99 | More details |
| iWeb | £100 one-off | £5 | £5 | n/a | 2%, max £5 | More details | |
| Etoro* | Free but no Isa or Sipp | Investment account offers stocks and ETFs. Beware high risk CFDs in trading account | Not available | Free | n/a | n/a | More details |
| Freetrade* | Free for Basic account, £4.99 per month for Standard with Isa | Freetrade Plus with more investments and Sipp is £9.99/month inc. Isa fee | No funds | Free | n/a | n/a | More details |
| Vanguard | 0.15% | Only Vanguard funds | Free | Free only Vanguard ETFs | Free | n/a | More details |
| (Source: ThisisMoney.co.uk Jan 2023. Admin % charge may be levied monthly or quarterly | |||||||
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