How dividends are taxed

What you’ll learn:

• What is a dividend and how the Dividend Allowance works
• How dividends are taxed now, and how has this changed?
• What impact the changes will have on your dividend income.
  

All taxpayers have an annual tax-free dividend allowance of £500, so only dividend income above this allowance is taxed.

Dividend allowance

The dividend allowance is in addition to your personal allowance, which is the amount you can earn each tax year before you have to start paying tax. In 2024-25 the personal allowance is £12,570. This means that if you receive £13,070 in dividend income this tax year, the first £12,570 could be covered by the personal allowance, and the remaining £500 by the dividend allowance.

The personal allowance is reduced by £1 for every £2 of an individual's adjusted net income above £100,000 removing the allowance in full for individuals with adjusted net income above £125,140.

Dividend tax rates

Dividend income in excess of the allowance will be charged depending on your highest rate of tax, e.g. if you receive dividends of £20,000, after taking account of the individual’s personal allowance and their divided allowance of £500, £6,430 is taxable. This falls into the basic rate tax band and so is taxed at 8.75%, the rate applied to dividend income for basic rate taxpayers. If the taxable dividend income tipped into the higher rate tax band, the rate of tax applied would be 33.75%, and for additional rate taxpayers 39.35% tax rate would apply.

Your income tax rate for the current tax year 2024/25 is 0% for earnings up to the tax-free personal allowance of £12,570. Between £12,571 and £50,270 it’s the basic rate band at 20%. For income between £50,271 and £125,140 you’re in the higher rate tax band of 40% and then for income over £125,140 you’re paying the additional rate of 45%.¹

What is a dividend?

A dividend is the portion of earnings that a company distributes among its shareholders one or more times a year. Dividend payment dates vary from company to company and the exact timing of when you receive that money after the company declares its dividend depends on several factors.
Operationally what happens on Smart Investor is that we receive a bulk payment which covers the amount due to all of our customers who own shares in the issuing company.

That payment might arrive on the dividend payment date, although it isn’t guaranteed and sometimes there is a delay. You can either instruct us to reinvest it in more shares, or pay it to you.

There are different types of dividends:

• Standard dividend – A regular payment to shareholders (not guaranteed)
• Special dividend - A special dividend is a one-off and typically a larger sum than the regular dividend. It’s usually when a company finds it has excess cash it wants to distribute.

What does the dividend allowance mean for investors?

The introduction of the dividend allowance means that investment (stocks and shares) ISAs may appear less appealing to those with dividend income below £500. However, it’s worth remembering that your dividend income may rise above this limit over time, and any profit you make when selling investments in your investment ISA is free of Capital Gains Tax (CGT). Profits on investments held outside of an ISA are potentially liable for CGT. However, each tax year individuals have a CGT allowance, currently £3,000, so if you sell a non-ISA investment you will only be taxed on any profit above that amount.

ISAs can therefore increase the opportunity for tax-free returns over the long term, provided that they remain in their present form. You can invest up to £20,000 in tax-efficient ISAs in the 2024-25 tax year. You can use your full £20,000 allowance in an investment ISA, or split however you want across a cash ISA, investment ISA, lifetime ISA (max £4,000), and an innovative finance ISA.² If you don’t use your allowance one year, it will be lost for good.

As well as the dividend tax allowance, there is also a personal savings allowance. This was introduced in April 2016 and changed the way interest is taxed. For more information on how the personal savings allowance works, read our article ‘What is the personal savings allowance and what does it mean for you?’

You should bear in mind that tax rules can change in the future and their effects on you will depend on your individual circumstances. The investments that you make can fall in value as well as rise; you might get back less than you invest.