Dividend tax increase – how much extra you will pay and how to beat it – Telegraph.co.uk

Many self-employed people pay themselves in dividends rather than a salary and would be hit even harder. A sole trader paying top-rate, 45pc, income tax taking £25,000 in dividends would pay the new 39.35pc rate on £23,000, assuming the personal allowance has been used up. This would mean a tax bill of £9,050.50 versus £8,763 under the current system.

Thousands of self-employed workers who use dividends to pay themselves were excluded from the Government’s income support schemes during the pandemic. They missed out on thousands of pounds in grants while they were unable to work and now will paying higher tax bills. 

How to dodge the dividend tax rise

The simplest way to avoid paying dividend tax is to use an Isa. Investment returns are not subject to income tax, capital gains tax or dividend tax. Currently you can put £20,000 a year into an Isa and £9,000 into a Junior Isa on behalf of your children. A family of four can shelter £58,000 each tax year in Isas.

However, many older investors will have substantial holdings outside of an Isa. Usually this is because they received an inheritance, when the allowances were lower. It can take many years to move an entire portfolio into the tax-free wrapper. Stockbrokers offer this service of selling and rebuying investments inside an Isa as “bed and Isa”.

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