Tax on dividends

Example – dividend income

Liz has a pension of £20,000 and receives dividends of £500 in 2024/25.

She has to pay tax at 20% on £7,430 of her pension (the amount left once her £12,570 personal allowance is used). However, she does not have to pay any income tax on her dividend income as it falls within the dividend allowance and is charged to tax at 0%.

If Liz received dividends of £11,000 instead, the £500 dividend allowance would apply to some of her dividends leaving the remaining £10,500 to be taxed at 8.75%. Liz would have tax of £918.75 to pay on the dividends and would need to contact HMRC to arrange payment. As her dividends are over £10,000, it is likely that HMRC will ask her to complete a tax return.

Example – dividend allowance and the basic rate band

Serenna has earnings of £40,650 and receives dividends of £10,000 in 2024/25. She has to pay tax at 20% on £28,080 of her earnings (the amount left once her £12,570 personal allowance is used). She does not have to pay tax on £500 of her dividend income because of her dividend allowance.

However, the dividends that fall within the dividend allowance still use up her basic rate band, so she has to pay tax at 8.75% on £9,120 of her remaining dividend income (£798.00) and at 33.75% on £380 (£128.25). In total, Serenna has to pay £926.25 of tax on her dividend income and needs to contact HMRC to pay it.

Example – interaction of personal savings allowance, starting rate for savings and dividend allowance

Part 1

Eric (not a Scottish taxpayer) has earned income of £15,000, savings income of £4,000 and dividend income of £500 in 2024/25.

He has to pay tax at 20% on £2,430 of his earnings (the amount left once his £12,570 personal allowance is used). He has £2,570 of the starting rate for savings band available as his earned income is less than £17,570. So, the first £2,570 of his savings income is taxable at 0%. As his adjusted net income is £20,000, his personal savings allowance is £1,000. This means that he has a tax rate of 0% on a further £1,000 of his savings income. He must pay tax at 20% on the remaining £430 of his savings income, which is £86. He does not have to pay any tax on his dividend income as it does not exceed his dividend allowance of £500. As tax is not deducted at source from savings interest, Eric will have to pay the £86 tax to HMRC another way.

The above example can be represented as follows:

Part 2

If, in 2024/25, Eric instead has earned income of £15,000, savings income of £4,000 and dividend income of £32,000, he has to pay tax at 20% on £2,430 of his earnings (the amount left once his £12,570 personal allowance is used). He has £2,570 of the starting rate for savings band available as his earned income is less than £17,570.

So, the first £2,570 of his savings income is taxable at 0%. As his adjusted net income is £51,000, his personal savings allowance is £500. This means that he has a tax rate of 0% on a further £500 of his savings income. He must pay tax at 20% on the remaining £930 of his savings income, since it falls into the basic rate band – £186 tax. He does not have to pay tax on £500 of his dividend income as it falls within his dividend allowance. He must pay tax at 8.75% on £30,770 (this is the amount of dividend income above the dividend allowance but which falls within the basic rate band) (£2,692.38 tax) and at 33.75% on £730 (the remaining dividend income, which falls within the higher rate band) (£246.37 tax) of his dividend income.

As tax is not deducted at source from savings interest or dividend income, Eric will have to pay the £186 tax on his savings interest and the £2,938.75 tax on his dividend income to HMRC another way.

Again, the above can be represented as follows:

Example – allocation of personal allowance

In 2024/25, Finlay (who is not a Scottish taxpayer) has employment income of £49,150, savings income of £800 and dividend income of £6,000. If he deducts his personal allowance in full against the employment income, the position is as follows:

However, the law allows you to deduct the personal allowance in the most beneficial way. If Finlay deducted only as much of his personal allowance against his employment income such that £37,700 of his employment income is charged to tax at 20%, the personal savings allowance and dividend allowance save tax at higher rates:

By doing this, Finlay is able to save tax of £281.50 (£9,232.25 less £8,950.75).

Example – earned income, savings income and dividend income (1)

In 2024/25, Adam has total taxable income of £18,400, made up of £16,500 wages and £1,400 savings and £500 dividends.

His tax can be worked out as follows:

Of the £5,000 starting rate for savings band, £3,930 has been used up by the earned income above his personal allowance, so £1,070 remains for Adam to use for his savings income. In addition, since Adam’s income (£18,900) all falls within the basic rate band, he is entitled to the £1,000 personal savings allowance. Adam also has a £500 dividend allowance.

Example - earned income, savings income and dividend income (2)

In 2024/25 Rupa has total taxable income of £28,900, made up of £21,500 wages and £1,400 savings and £6,000 dividends.

Her tax can be worked out as follows:

All of the £5,000 starting rate for savings band has been used up by the earned income above her personal allowance. Since Rupa’s income (£28,900) all falls within the basic rate band, she is entitled to the £1,000 personal savings allowance. Rupa also has a £500 dividend allowance:

Rupa will have to make sure that HMRC know that she has both savings and dividend income on which she will have to pay tax. HMRC will probably collect the tax through Rupa’s PAYE code or through self assessment, by asking Rupa to complete a tax return.

Example – higher rate taxpayer

In 2024/25, Sam has total taxable income of £51,900, made up of £44,500 wages and £1,400 savings and £6,000 dividends.

Their tax can be worked out as follows:

All of the £5,000 starting rate for savings band has been used up by the earned income above their personal allowance. Since some of Sam’s income (£51,900) falls within the higher rate band, they are only entitled to the £500 personal savings allowance. Sam also has a £500 dividend allowance. Note also that the basic rate band is £37,700. Sam’s earned income has used £31,930 of this band, leaving £5,770 for the savings and dividend income:

Note that some of the dividend income exceeding the dividend allowance is taxable at the higher rate. This is because the income that falls within the personal savings allowance and the dividend allowance still uses up the basic rate band.