The topic shows how asset "location" and the structuring of finances is as important in maximising returns as savvy stock picking and risk management.

Revelations that a squeeze on tax dividends has hit millions more UK investors only serves to highlight the need to use savings accounts and pensions. However, for some investors it is hard to avoid the revenue juggernaut, wealth manager Charles Stanley says. 

Recently, Quilter, another wealth manager, announced that it had used Freedom of Information powers, taking data from HM Revenue & Customs, showing how many more people pay dividends on investments than was the case a few years ago.

The data comes as speculation continues on what UK Chancellor of the Exchequer Rachel Reeves will do in trying to fill a “black hole” in public finances in the autumn Budget.  

“The dividend allowance has been slashed almost to a vanishing point already, so a further cut is not going to raise significant revenue,” Rob Morgan, chief investment analyst at Charles Stanley, said when asked about the matter by WealthBriefing. “That said, if this Budget is a case of rummaging down the back of the sofa for any small change that can be found, then a cut of the dividend allowance altogether could easily happen.”

Quilter’s report said an unprecedented 3.67 million people paid dividend tax in the 2024/25 financial year. That figure almost doubled on two years before.

“For those impacted by the tax, it’s important to look at utilising other allowances. Any income produced by investments housed in tax-efficient ISA accounts or pensions is tax free, as are any profits,” Charles Stanley’s Morgan said. 

“Using up the annual ISA allowance of £20,000 each year means it is possible to build up a significant portfolio of investments sheltered from tax, while also reducing or eliminating the administration involved in tax returns or HMRC reporting. Even if it doesn't seem relevant now, using this allowance, including habitually migrating any unsheltered holdings into ISA accounts, can minimise [the] tax burden over time,” he continued. 

There are other approaches, Morgan said.

“Those who are married or in a civil partnership can also consider splitting income-producing assets, either by holding them in joint names or allocating them to the partner with the lower income and tax liability,” he said. 

The topic also shows how asset “location” is becoming as significant as asset allocation as a wealth management concern. 

“The arrangement of asset types can also impact tax liability. For instance, it can make sense to prioritise ISA allowances for dividend-producing investments rather than cash,” Morgan said. “For basic rate taxpayers, the personal savings allowance applied to interest on cash at £1,000 is significantly higher than the dividend allowance, and the return on cash is often lower than that from dividends over the long term as dividends increase. However, the situation will depend on the tax position, the mix of assets owned and how much is paid in interest on cash,” he said.  

There are traps for the unwary, he said.

“It is very easy for investors to be caught out with tax on dividends from legacy share or fund holdings which they acquired outside a tax-efficient wrapper and never got round to tidying up,” Morgan said. “[There are] the various privatisations that occurred in the 80s and 90s for instance. What started as a minor inefficiency could now have morphed into a major tax headache for some. It just goes to show the value of planning ahead and habitually using tax-efficient allowances for investment as a matter of priority – even if it doesn’t seem relevant at the time.”