For this tax year, whilst the dividend allowance of £500 has remained frozen, the tax rate has increased 2 percentage points on each tax band (ordinary rate is 10.75%, upper rate is 35.75%). This has led many to review their investment strategies. The two main ones are:
- Stocks and Shares ISA – ideal for high-yield equity and UK equity income funds.
- Pension – ideal for long-term compounding of reinvested dividends, higher-rate taxpayers who want maximum tax efficiency, people expecting to be basic-rate taxpayers in retirement.
Both ISAs and pensions make dividends completely tax-free, but they do it in different ways and with very different consequences for access, tax relief, and long-term efficiency. ISAs win on flexibility; pensions win on raw tax power. If your goal is pure dividend efficiency, pensions are mathematically superior because you get tax relief on contributions, dividends grow tax-free and you may withdraw at a lower tax rate than you saved going in.
Other options to consider, particularly if you are a company director who pays part of your salary as dividends:
- Use spouse or partner allowances – transfer shares to your lower-earning spouse to use their allowances and lower tax band. Each partner has their own dividend allowance and personal allowance, doubling efficiency if structured well.
- Time dividends across tax years – spreading dividends across years helps avoid higher tax bands and makes full use of allowances.
- Consider capital gains instead of dividends – extracting value via share sales may qualify for CGT reliefs like Business Asset Disposal Relief. CGT rates can be lower than dividend tax.
Please get in touch with us to discuss your options.
