A dividend is a slice of a company’s post-tax profits, which the company may pay its shareholders as a reward for investing in it.
Here, we look at:
When do you pay tax on dividends?
What is the dividend allowance?
Do dividends count towards your ISA allowance?
You can earn some dividend income each year without paying tax. If the dividend income you receive is over your Personal Allowance, you’ll need to pay tax on it.
The standard Personal Allowance is £12,570. This is the amount of income that you don’t have to pay tax on. However, this threshold will depend on your personal circumstances. For example, it may be higher if you claim marriage allowance or smaller if your income is over £100,000.
You also receive a dividend allowance each year. You will only pay tax on any dividend income that exceeds the dividend allowance.
The dividend allowance is the amount of dividends you can earn tax-free each year.
The dividend allowance is £500 for the current tax year (6 April 2024 to 5 April 2025). This is lower than the dividend allowance for previous tax years. That means you can earn a £12,570 Personal Allowance plus £500 in dividends as tax-free income, if you have no other income.
You don’t pay tax on dividends from shares in an ISA or pension.
If your investments are held in an Individual Savings Account (ISA) or pension, they will be shielded from UK dividend tax and will not count towards your annual ISA allowance or annual pension allowance.
You don’t need to include the ISA dividends in your income when working out your tax. This also applies to dividends received by pension funds.
How much tax you pay on dividends above the dividend allowance depends on your income tax band. The current tax rate on dividends over the allowance is:
Here are some examples to help you calculate your dividend tax for the 2024 to 2025 tax year.
Let's say you receive £20,000 in dividends as your only income. Subtract £12,570 (your Personal Allowance) and £500 (your dividend allowance), leaving you with £6,930 taxable income.
Here, you would be a basic rate taxpayer who has £6,930 of dividends taxed at 8.75%. Therefore, dividend tax would be £606.38.
Let's say you earn an annual wage of £55,000 and receive £2,000 in dividends. Add these together to give you a total income of £57,000.
Here, you would be a higher rate taxpayer who has £1,500 of dividends taxed at 33.75%. Therefore, dividend tax would be £506.25.
If you earn up to £500 in dividends, there is no need to inform HM Revenue & Customs (HMRC) unless you have to complete a self-assessment tax return for another reason.
If you earn between £500 and £10,000 in dividends, you must let HMRC know. You can do this by:
If you earn more than £10,000 in dividends, you’ll have to fill in a self-assessment tax return. If this is your first time, you’ll need to register first.
For more information on how to contact HMRC and self-assessments, visit GOV.UK: tax on dividends.
As with all things tax-related, the value of the benefits to you will depend on your circumstances, and tax rules could change in the future.
This article was last updated: 25/11/2024, 06:56
