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Published 09 April 2024
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Dividends Tax Explained

HMRC requires you to pay tax on all types of income, including from dividend payments. But your allowance is in play, and there are varying rates.

What is dividend tax?

Once you pull in a certain amount of money, the government will want its cut. That applies not only to salaries but also to other income, including investment gains.

When you own shares in a company and you are paid a portion of company profits in the form of a dividend, HM Revenue & Customs (HMRC) will normally expect you to declare and pay tax on it.

» MORE: About paying tax

How are dividends taxed?

Anyone making less than £100,000 can currently earn up to £12,570 each fiscal year without paying any tax on their income. This is your personal allowance. 

Dividends can count towards your personal allowance, provided your personal allowance hasn’t already been exhausted by other income streams, such as a salary or pension. This means that if the only income you receive from April to April is dividends and they total less than £12,570, then you don’t owe the taxman anything.

Every year, the government also grants investors an additional tax-free dividend allowance. In the 2023/2024 tax year, the dividend allowance was £1,000. For the 2024/2025 tax year, the dividend allowance has been cut to £500. You only pay tax on income from dividends above the dividend allowance.

How much are dividends taxed?

Dividend tax rates are based on your overall earnings. The table below shows how much dividends tax you’ll have to pay from April 2024.

Income tax band*/ Dividend Tax rate
  • Basic rate (income between £12,571 and £50,270) – 8.75% dividend tax rate
  • Higher rate (income between £50,271 and £125,140) – 33.75% dividend tax rate
  • Additional rate (income above £125,140) – 39.35% dividend tax rate

Source: UK Government *Income tax bands differ slightly for people living in Scotland

To work out your tax band, add dividend takings to all other sources of taxable income. For example, if you earn £29,570 in wages and £3,000 in dividends in the 2024/2025 tax year, your total income would be £32,570.

Your personal allowance of £12,570 would be deducted from this leaving £20,000 that is subject to tax.

This income sits in the basic tax band which means that you’d pay:

  • 20% tax on £17,000 of wages
  • 0% tax on £500 of dividends (because of the allowance) 
  • 8.75% tax on the £2,500 worth of dividends over the allowance

Dividends enter the equation only after tallying up income from work, pensions, property, and then interest on savings accounts. As illustrated, coming last is generally a good thing because these payments are subject to lower taxation.

» MORE: About income tax

How do I pay tax on dividends?

If you pocket more than £500 in dividends, you’ll need to let HMRC know. For returns of £10,000 or less, you can ask the tax authority to adjust your tax code so that the money is taken directly from your wages or pension.

That option disappears when annual dividend income exceeds £10,000. In such cases, the only available path is to file a separate self-assessment tax return.

How to avoid tax on dividends

Luckily, there just so happens to be a legal way to significantly reduce or completely wriggle out of paying dividend tax: investing through a stocks and shares ISA. All UK residents over 18 can deposit up to £20,000 each year into these accounts, with any funds held within them shielded from dividend and capital gains tax obligations.

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk.

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