Tax Rate on Dividends

Dividends are a popular way for investors to receive income from their shares in UK companies. However, as with all types of income, dividends are subject to taxation. Understanding the dividend tax rates and how they apply can help investors manage their tax liabilities effectively. This article provides a detailed overview of the UK’s tax rate on dividends for the 2024/25 and 2025/26 tax years, exemptions, and how to optimise your dividend income.

Tax Rate on Dividends in the UK

The UK tax system treats dividends differently from other forms of income, such as salary or interest from savings. However, HMRC requires tax to be paid on all types of income. Dividends received by UK residents are taxed at a special set of rates, which vary depending on an individual’s overall income and tax band.

Dividend Allowance

As of the 2024/25 tax year, UK taxpayers can receive up to £500 in dividend income without paying tax. This is known as the Dividend Allowance which has remained the same after April 2025. Any dividends received above this threshold will be taxed according to the individual’s marginal tax rate. It’s important to note that this allowance has been reduced from previous years, where it was higher, reflecting changes in government policy to increase tax revenues from investments.

How much tax do you pay on Dividends?

Once the £500 allowance is used up, dividend income is taxed at the following rates based on the individual’s overall income:

Basic Rate (Income up to £50,270):

• Dividend Tax Rate: 8.75%
• For individuals in the basic rate tax band, dividends above the £500 allowance are taxed at 8.75%, which is lower than the income tax rate on earnings (20%).

Higher Rate (Income from £50,271 to £125,140):

• Dividend Tax Rate: 33.75%
• For individuals whose total income (including dividends) falls within the higher rate band, the tax on dividends is 33.75%, which is lower than the income tax rate on earnings (40%).

Additional Rate (Income above £125,140):

• Dividend Tax Rate: 39.35%
• The highest tax rate on dividends applies to those in the additional rate band, taxing dividends at 39.35%, which is lower than the income tax rate on earnings (45%).

Tax-Free Dividend Income for Low Earners

If your total income (including dividends) is below the personal allowance, which is £12,570 for the tax year, you won’t pay tax on your dividend income. This is because your income is below the threshold at which any tax is due. However, if your income exceeds the personal allowance, dividend income above £500 will be taxed based on the rates outlined above.

How to Pay Dividend Tax

For most taxpayers, dividend tax is collected through Self-Assessment. This means that if your dividend income exceeds the £500 allowance, you will need to declare it on your annual tax return. HMRC will calculate the tax owed, and payment is typically due by the following January.

If you are an employee or receive pension income and your dividend income is below £10,000, you may be able to ask HMRC to adjust your PAYE tax code to collect the tax via payroll, instead of completing a Self-Assessment.

Tax Rate on Dividends from ISAs

One of the most tax-efficient ways to receive dividends is through a Stocks and Shares ISA. Any dividends paid on investments held within an ISA are tax-free. There’s no need to declare them on your tax return, and they won’t count toward your dividend allowance. This can be a valuable strategy for long-term investors looking to shelter their income from taxation.

Strategies to Minimise Tax Rate on Dividends

Use Your ISA Allowance:

Every UK resident gets an annual ISA allowance (currently £20,000), which allows them to invest in stocks and shares without paying tax on dividends or capital gains.

Income Splitting:

Couples can consider sharing dividend income by holding investments in the name of the lower-earning spouse, reducing the tax burden if one partner is in a lower tax band.

Plan for Income Timing:

By carefully planning when to take dividend payments, investors may be able to avoid higher tax rates. For example, taking dividends in years when overall income is lower can reduce the amount of tax owed.

Conclusion

The tax rate on dividends in the UK can significantly affect an investor’s returns, especially as the Dividend Allowance has been reduced in recent years. For many, making use of tax-efficient investment vehicles like ISAs or careful income planning can help minimise tax liabilities. It’s important to stay informed about changes to the tax system and seek professional advice if necessary, to optimise your tax position based on your individual circumstances.

Understanding how dividends are taxed is crucial to making informed decisions about investing in shares, allowing investors to balance income with tax efficiency and grow their wealth. If you need help understanding your tax rate on dividends or want more information on planning your personal tax, speak to our personal tax accountants.