Income Tax on dividends
Introduction
This briefing provides an overview of dividend tax for individuals, the different rates and allowances of tax which apply and how dividend tax is calculated.
Core considerations
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Dividends are payments made by a company to their shareholders.
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All individuals are entitled to a Dividend Allowance, which for the 2024/25 tax is £500.
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The rates of dividend tax paid will depend on the amount of other income the individual has and the tax band the dividend income falls into.
Contents
What are dividends?
Dividends are payments made by a company to their shareholders to share the profit they have made over a certain financial period. If an individual owns shares in a company, they may be eligible to receive dividends. They are typically paid regularly, and they are a way in which investors can earn a return when investing in stocks and shares either directly or through collective investments.
As with most types of income, individuals may have to pay tax on the dividend amount received.
The Dividend Allowance
All individuals (irrespective of their total income amount) are entitled to a dividend allowance, which for the 2024/25 tax is £500. If the total amount of dividends received in a tax year is below this amount, there will be no tax to pay.
The dividend allowance is in addition to the standard Personal Allowance of £12,570, for tax year 2024/2025. This means that if the individual’s income is solely from investments they can earn a total of £13,070 before paying any tax, £12,570 from the personal allowance and £500 Dividend Allowance.
Tax is not paid on dividends from the investments held within an ISA.
Dividend rates of tax for individuals
The rate of dividend tax that is paid is based on the tax band that an individual’s dividend income falls into, after their non-savings and savings income. This means taxable dividends will be taxed at the individual’s highest rate of tax.
Tax band | Tax rate on dividends over the allowance |
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Basic rate | 8.75% |
Higher rate | 33.75% |
Additional rate | 39.35% |
For example – basic rate taxpayer
Hamish receives £2,000 in dividends and earns £30,570 in salary – a total income of £32,570. Hamish has a personal allowance of £12,570 which can be deducted from his total income. This leaves a total taxable income of £20,000 – which is in the basic rate tax band.
Hamish will pay 20% income tax on £18,000 on his salary (£30,570 minus £12,570), no tax on the first £500 of dividends, because of the dividend allowance, and 8.75% tax on the dividend balance of £1,500 = £131.
For example – higher rate taxpayer
Carole receives £60,000 a year in dividends. She has no other income. Carole has a personal allowance of £12,570 and £500 dividend allowance, which means £13,070 of her dividend income is tax free and £46,930 is taxable.
The first £37,200 is within the basic rate tax band which is taxed at 8.75%. The remaining £9,730 is in the higher rate tax band and are taxed at 33.75%. This means Carole will pay a total of £6,539 tax on her dividends.