A record 3.8m investors and business owners are expected to pay dividend tax in 2026-27.
Many are still reeling from the fact the annual tax-free allowance for dividends has faced some pretty savage cuts, most recently in 2024.
As a result of this unwelcome tax raid, far more individuals are now facing charges on their dividend income.
On top of this, the rates at which dividend tax is paid for basic-rate and higher-rate taxpayers increased by two percentage points from April 6.
The good news is, there are legitimate ways to shield your dividends from the taxman.
Here, Telegraph Money explains what the dividend allowance is now, and what to do if you need to pay tax on your returns.
Dividend tax is charged on dividend income, when a portion of a company’s earnings are distributed to shareholders. Dividends provide investors with an income in proportion to their holding of shares in a company.
Alice Haine of online investment platform Bestinvest, by Evelyn Partners, said: “As with any type of income, an individual receiving a dividend payment may be liable for tax. This is something that needs to be considered by business owners and partners or shareholders in private businesses – as well as stock market investors.”
The rate of tax you pay depends on which income tax bracket you fall into – more on this below.
There are tax-free allowances you can set against dividend income – and you’ll only pay tax on income that exceeds this.
For starters, any dividend income that falls within the personal allowance of £12,570 is not liable for tax. In addition, taxpayers have a dividend allowance. For the 2026-27 tax year, the dividend allowance is £500. This has been held at this level since 2025-26.
Once dividend income exceeds the dividend allowance, you are then liable for tax.
Note that dividends from shares in an Isa or pension are not subject to dividend tax.
Right now, the annual tax-free dividend allowance sits at just £500. It was halved from £1,000 in the April at the start of the 2024-25 tax year, having already been slashed from £2,000 to £1,000 in the previous financial year.
That means the current £500 allowance is just a quarter of the £2,000 that investors could tap into in 2022-23. And it is a huge 90pc reduction from the £5,000 allowance available back in 2017-18.
Ms Haine said: “When you consider it was £5,000 as recently as this, it means far more taxpayers are now facing tax on their dividends.”
