Dividend tax explained - Which? (2024)

What is dividend tax?

If you own shares in a company, there are two ways you can earn money: from selling the shares if they grow in value or from dividends paid by the company if it chooses to distribute profits to shareholders.

Dividends can be a great way to generate a regular income from your investments. But, as with any income you earn, you may have to pay tax.

While tax on dividends is lower than the rate you'll pay on money from work or a pension, from 6 April 2022 dividend tax rates went up by 1.25 percentage points.

You can use your tax-free dividend allowances, meaning you can earn more income from your investments before you'll start paying tax.

This guide explains everything you need to know about dividend tax - how to work out your bill, how much you'll pay and how dividend tax has changed.

How much tax do I pay on dividends in 2023-24?

The rate of dividend tax you pay depends on your tax band:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

In the 2023-24 tax year, you won't need to pay any tax on the first £1,000 of dividend income you receive. This is called the tax-free dividend allowance.

The allowance was cut from £2,000 in the 2022-23 (and was £5,000 as recently as 2017-18). It's also due to be cut again in 2024-25

If your only income is from investments, then you can also use your tax-free personal allowance before you start paying tax on dividends.

So on top of the £1,000 dividend allowance, you could earn another £12,570 tax-free in 2023-24 (the same as in 2022-23). This is the personal allowance.

You don't pay dividend tax on any shares, funds or trusts held in a stocks and shares Isa.

You can also use our dividend tax calculator to work out your potential tax bill.

When is dividend tax payable?

The £1,000 allowance means that you'll need a relatively large portfolio outside your Isa before you'll start paying the dividend tax.

Dividends aren't guaranteed, and the amount you receive will depend on how much profit the companies you are investing in make and how much they pass on to shareholders.

A share generating a relatively healthy profit might yield a 5% income - if it did, you would need investments worth more than £20,000 before your dividends start to be taxed.

If you're earning more from your investments, or expect to grow your investments by adding to them, you can transfer shares into your Isa to avoid paying tax in the future.

Which dividend tax rates will I pay?

The general rule is that your tax rate depends on how much income and capital gains you've received in any given year.

• If you get less than £12,570, this falls within the personal allowance and you won't pay any tax.
• Income between £12,570 and £50,270 is in the basic-rate tax bracket.
• Income between £50,270 and £150,000 is in the higher-rate tax bracket.
• Income above £150,000 is in the additional-rate tax bracket.

To complicate things further, you'll start to lose £1 of the personal allowance for each £2 you earn over £100,000.

The principle is the same in Scotland, although the Scottish tax bands and rates are slightly different.

• Find out more: UK income tax rates 2023-24

How do I work out my dividend tax bill?

When working out how much tax you pay, HMRC will 'stack' your income, first counting your income from work and pensions and property, then your savings income and then your dividend income.

If you've made capital gains, that gets calculated after your income tax.

This is important - and works in your favour - because it generally means the dividends, rather than other income, will be taxed at the highest rate. As tax on dividends is lower than other income, this could reduce your tax bill overall.

For example, if you received £45,000 from a job and then £9,000 from dividends, your tax bill would breakdown like this:

1. First £12,570 of your employment income falls within the personal allowance. Tax bill: £0
2. Remaining £32,430 is taxed at the 20% basic rate. Tax bill: £6,486
3. First £1,000 of dividend income falls within the dividend allowance. Tax bill: £0
4. Next £4,270 of dividend income (what's left of your basic-rate threshold for income tax) taxed at the 8.75% dividend tax basic rate. Tax bill: £373.63 (rounded up)
5. Remaining £3,730 of dividend income taxed at the 33.75% dividend tax higher rate. Tax bill: £1,258.88 (rounded up)
6. Total tax bill: £8118.50

If you earn up to £1,000 in dividends, you don't need to do anything. No need to inform HMRC, just enjoy your dividend income as you see fit.

But if you earn between £1,000 and £10,000, you'll need to tell HMRC. You can pay the tax due in one of two ways: have HMRC adjust your tax code, so that the tax is taken from your salary or pension, or by filling out a self-assessment tax return.

If you earn more than £10,000 in dividends, you'll need to complete an online tax return or paper tax return.

• Get a head start on your 2022-23 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?

When will I have to pay the higher dividend tax rates?

In September 2021, the government announced an increase to dividend tax rates by 1.25 percentage points, which came into force on 6 April 2022.

The new rates apply to dividends taken as income in the 2022-23 tax year and thereafter.

If you pay tax on dividend income through your tax code, your dividend tax bill will have gone up from 6 April 2022. But if you pay tax through a self-assessment tax return, you'll have until 31 January 2024 to pay the higher dividend tax rates on your 2022-23 dividend income.

Do I pay dividend tax equity investment funds?

Dividend taxes don't just apply to income from shares. You'll also have to pay it on the income you get from funds that invest in shares on your behalf.

So for holdings in investment funds or investment trusts, you'll need to pay the dividend tax if they are investing in equities.

But if you hold bond funds, which effectively lend to companies and governments by buying their debts, that income counts as interest and will be taxed as savings income.

Higher and additional-rate taxpayers need to declare interest payments from bonds funds on their tax return. From April 2017, tax isn't deducted at source, so you'll receive the money before tax has been collected.

These taxes only apply to income from your investments - if the value of your stake in the fund, shares or bonds you hold increase, you may need to pay capital gains tax on those profits.

Find out more:are you ready to invest?

When you come to sell your shares, you could pay tax on any profits you make. This would be a capital gains tax (CGT).

Much like dividends, you get an annual tax-free allowance on capital gains. In 2023-24, this is £6,000 - less than half what it was in 2022-23 (£12,300).

If the profit you make when selling your shares is below this amount, you won't have to pay tax.

Above this level, gains are taxed at 10% if you're a basic-rate taxpayer, or 20% if you're a higher or additional-rate taxpayer.

Find out more:capital gains tax on shares

Tax on dividends earned before April 2016

Before April 2016, dividends were taxed differently. Any dividends you earned were deemed to have been taxed at 10% before they were paid to you.

This was regardless of whether you chose to reinvest them or had dividends paid in cash. The 10% deduction resulted in investors being given a tax credit. This meant that:

• Basic-rate taxpayers had no further tax to pay.
• Non-taxpayers also had this tax deducted and couldn't claim it back.
• Higher-rate taxpayers paid dividend tax at 32.5% - but after the tax credit, this became an effective tax rate of 25%.
• Additional-rate taxpayers paid dividend tax at 37.5% - but after the tax credit, this became an effective tax rate of 30.6%.

But how did this 'effective tax rate' work?

For every £90 in dividends a higher-rate taxpayer received, they were given a £10 tax credit, which makes a 'gross' dividend of £100.

Applying the rate of 32.5% to £100 gave £32.50 tax due. But this was reduced by £10 - the amount of the tax credit - to give a remaining liability of £22.50.

As a percentage of the £90 received, £22.50 is 25%, so this was the effective rate of tax the shareholder actually pays.

Use our jargon-free calculator to complete and securely submit your tax return direct to HMRC.