You haven’t changed your investments. But suddenly, you’re paying more tax.
The culprit? A quiet but significant change to the dividend allowance, now slashed to just £500, that’s catching many income investors and semi-retirees off guard.
If you hold income-producing investments outside an ISA or pension, this small shift could mean a bigger tax bill than you bargained for.
What Changed – And Why It Matters
Back in 2016, the dividend allowance was a generous £5,000. It dropped to £2,000 in 2018, then to £1,000 in 2023. Now, in 2025, you’re working with just £500 in tax-free dividend income. That’s not per holding, that’s your total allowance, full stop.
On a modest portfolio, this might not seem dramatic. But for anyone with income-focused investments in a general investment account (GIA), the tax drag is growing fast.
Who’s Feeling the Pinch?
The hardest hit are those with GIA-heavy portfolios, including:
- Semi-retired investors drawing a mix of income streams
- Clients who’ve maxed their ISA and pension contributions
- DIY investors who’ve let wrappers grow inefficient over time
Even if your investment returns are steady, your tax bill might not be.
The Hidden Math: How £500 Becomes £1,000+ in Tax
Let’s say you hold a GIA portfolio generating £20,000 in dividend income annually. Under the old £2,000 allowance, £18,000 would be taxed. This year? It’s £19,500.
Here’s the hit:
- Basic-rate taxpayers pay 8.75% on dividends above the allowance = £1,706.
- Higher-rate taxpayers pay 33.75% = £6,581.
That’s a steep charge for passive income you may have expected to be low-maintenance.
What You Can Do About It
There are still ways to keep more of your dividend income. Start with:
- Maximise ISA contributions – Each adult has a £20,000 annual limit. Prioritise high-yield funds here.
- Make the most of family allowances (but do it right) – Couples can move investments between them to share allowances and reduce tax. That’s totally fine for spouses and civil partners. But gifts to under‑18s usually get taxed back to you, and adult children must genuinely own and benefit from what you give them.
- Choose accumulation units (for long-term focus, not tax savings) – These automatically reinvest your dividends, helping your pot grow quietly in the background. Just remember, outside an ISA or pension, you’ll still pay tax on that income, even if it’s reinvested. The real benefit is compounding, not avoiding tax.
- Rebalance for growth where it makes sense – Some funds aim for growth rather than income, which can help reduce dividend tax over time. You get a £3,000 tax‑free gains allowance each year, and most gains after that are taxed at 18% or 24% depending on your income. You can also plan sales gradually or move investments into an ISA when it suits.
This Isn’t “Just £500”
That missing £1,500 allowance (compared to just a few years ago) adds up over time. Left unchecked, it can quietly erode your net returns and slow down your wealth-building efforts, especially if you’re relying on your portfolio for income.
If your investments are outside tax-efficient wrappers or you’re unsure how to respond to the new rules, let’s talk. A few small changes now could save you a lot in the long run.