How to beat the dividend tax increase

Those who invest through a general account may find themselves paying higher taxes when the new dividend¹ tax rates come into force from 6 April 2026.

However, there is a simple way to not only avoid the new tax increase but also make use of other benefits that come with investing tax efficiently.

In this article, we explore what the dividend tax changes mean for you and why topping up your individual savings account (ISA) before 6 April can help you stay one step ahead of future tax bills and reach your long-term investing goals faster.

What changes are being made to dividend tax?

As announced in last year’s Budget, some investors will see a 2-percentage-point increase in the rate of tax they pay on dividends they earn from shares (or from funds investing in shares). 

Currently, basic-rate taxpayers pay 8.75%, higher-rate taxpayers 33.75% and additional-rate taxpayers 39.35% on dividends that exceed the annual tax-free allowance of £500. From 6 April, these rates will rise to 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers. The rate for additional-rate taxpayers will stay at 39.35% while non taxpayers will pay no tax.

Only investors receiving dividends outside tax-efficient wrappers, such as ISAs or pensions, are subject to dividend tax. For example, a basic-rate taxpayer investing in a general account and earning £1,000 in dividends will currently pay £44 in dividend tax. This would increase to £54 under the new rates. Meanwhile, a higher-rate taxpayer investing in a general account and earning £2,000 of dividends will currently pay £506 in dividend tax. Once the new rates are implemented, this would rise to £536.

How an ISA can reduce your tax bill

When you invest through an ISA, however, any income you receive – from dividends or interest – is tax free. This could have a meaningful impact on your overall balance, particularly if tax rates continue to rise. 

What’s more, any gains made inside an ISA are completely free from capital gains tax (CGT), offering a double layer of protection.

You can currently invest up to £20,000 each tax year across your ISAs². 

If you hold investments in a general account and haven’t used up your ISA allowance for the year – and have no plans to do so with ‘new’ money – you can sell those investments and reinvest them in an ISA. This process is called ‘bed and ISA’. When you initially sell your investments, you’ll be liable to CGT on profits that exceed your CGT allowance (currently £3,000). However, once your investments are inside the ISA wrapper, all future returns are sheltered from tax.

Use it or lose it!

With dividend tax rates rising from 6 April, maximising your 2025-26 ISA allowance is one of the most effective ways to avoid paying more tax on your investments.

Your ISA allowance resets on 6 April every year, which means you can’t carry it over to the new tax year – you ‘use it or lose it’. And not using your allowance also means losing the effects of compounding. This is when you earn returns on the money you invest as well as on the returns themselves. It’s a simple concept, but it can have a noticeable impact on your long-term wealth.

With the end of the tax year fast approaching, now is the best time to ensure you are making the most of your ISA allowance. For more tools and guidance and to find out about Vanguard’s ISA offerings, check out our tax year-end hub.

¹ Dividends are the payments some companies make to shareholders out of their profits.

² From 6 April 2027, the amount you can put into cash ISAs will be capped at £12,000 a year for those under age 65, with the rest of the allowance reserved for investments. People aged 65 and over will still be able to put up to £20,000 into cash ISAs.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The eligibility to invest in either ISA or Junior ISA depends on individual circumstances, and all tax rules may change in future.

Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Important information

Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.

This is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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