Tax on dividends
If you own shares in a company, there are two ways you can earn money. The shares can grow in value, allowing you to make a gain when you sell them. Companies also distribute the profits they make in the form of a dividend. This is known as dividend income.
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Generally, if you have taxable dividend income, you should consider the following allowances in working out whether you owe tax on that income:
- The personal allowance (£12,570 for 2023/24) – this is deducted from your taxable income before tax is calculated. If you are eligible for the blind person’s allowance, this is treated in the same way.
- The dividend allowance (£1,000 for 2023/24) – this is a nil-rate band which applies only to dividend income and is explained in more detail under the heading: Dividend allowance.
If you still have taxable dividend income after deducting the above, then you will owe tax on that income at the rates which apply to dividend income. For more information, see our page Tax and NIC rates and bands.
The rate which applies depends on where the taxable dividend income falls in your ‘stack’ of taxable income:
- Taxable dividend income above the dividend allowance and falling within the basic-rate band is taxed at the dividend ordinary rate.
- Taxable dividend income above the dividend allowance and falling within the higher-rate band is taxed at the dividend upper rate.
- Taxable dividend income above the dividend allowance and falling above the higher-rate band is taxed at the dividend additional rate.
For more information on this, see our Income tax page under the heading Order of taxation.
If you are a Scottish or Welsh taxpayer, you pay tax on your dividend income in the same way as taxpayers from the rest of the UK.
Dividends within ISAs
If you have an individual savings account (ISA) that receives dividends, you do not need to include the ISA dividends in your income when working out your tax. Dividends from ISAs are not taxable income.
If the shares are held in joint names, see our separate guidance on what proportion of the dividend income is taxable on each person.
You do not have to pay tax on dividend income which falls within the dividend allowance for that tax year.
Level of the dividend allowance
For 2022/23, the dividend allowance was £2,000 (see GOV.UK for earlier years). For 2023/24, the dividend allowance is reduced to £1,000. It is expected to be reduced further to £500 per year from 2024/25 onwards.
Availability of the dividend allowance
The dividend allowance is available to anyone no matter how much income they have.
How the dividend allowance works
To the extent that dividend income falls into your dividend allowance, it is taxable at 0%, which means you have no tax to pay on it. If you have no tax to pay on your other income either and you make charitable donations under gift aid, you may need to pay a charge.
Income that is within your dividend allowance counts towards your basic or higher rate limits and may therefore affect the amount of personal savings allowance that you are entitled to and the rate of tax you pay on dividend income that exceeds your allowance.
Two further examples are given below showing how the personal savings allowance, starting rate for savings, personal savings allowance and dividend allowance interact.
Tax credits and universal credit – dividend treatment
Dividends are counted as income for tax credits purposes, even where they fall within your dividend allowance. This is because those dividends are still taxable income, even though they are charged to tax at a nil rate.
For universal credit, dividend income is ignored, and your shares are treated as capital.
Deduction of tax at source
You receive UK dividends gross – no tax is deducted at source. This means that the amount the company declares as a dividend and pays to its shareholders is the gross dividend. This is the amount you include in your taxable income, when you work out how much tax you have to pay. So, if the company pays you a dividend of £100, this is the gross dividend, which you must include in your tax calculation.
If you owe tax on your dividend income
Taxpayers are not required to notify HMRC of their dividend income if dividends fall wholly within the dividend allowance for that year.
However, if you have dividends not covered by the dividend allowance, you should either:
- notify HMRC, if HMRC have not asked you to fill in a tax return for the year, or
- include those dividends in the relevant section of your tax return.
The examples below demonstrate how to work your tax in situations where you have three different types of income: earned income, savings income and dividend income.