Tax on Dividends, Dividend Tax Rates and Dividend Allowance

A dividend is money that's paid out by limited liability companies to investors, usually on a quarterly or annual basis. These payouts are based on the quarterly profits of your company as well as the amount of stock you own.

Dividends are calculated based on profits-what is left in your company after all expenses have been paid-not revenue.

Dividends can be either paid in cash or reinvested into your investment portfolio via dividend reinvestment, or via SCRIP dividends-which allow companies listed on the LSE to give investors additional shares instead of cash payouts.

Dividend tax refers to the rates by which those dividends are taxed according to HMRC. Each year, these tax rates may differ.

‍

The current dividend tax rate is calculated via a combination of your income tax band and a dividend allowance. 

To calculate how much to pay in dividends, you have to understand income tax bands. You will have to include dividends into your income to determine your tax band and the amount to pay tax on.

Dividend Tax Allowance: 

For the 2024/25 tax year, a tax free dividend allowance of £500 is provided. This means that you only need to pay tax on dividends exceeding that amount (or, in other words, you won't need to pay dividend tax if you make less than £500). 

The tax free dividend allowance for the 2017/2018 tax year was £5,000. Changes that went into effect starting from April 2018 saw the tax free dividend allowance reduced to £1,000.

Personal Allowance: 

For the 2024/25 tax year, the personal allowance or tax free personal allowance is £12,570.

For the 2021/22 tax year, the personal allowance or tax free personal allowance is £12,570.

For the 2020/21 tax year, the personal allowance or tax free personal allowance is £12,500.

Dividend Tax Thresholds:

The dividend tax rates and tax thresholds for the 2024/25 financial year is indicated in the table above.

You may refer to the HMRC website for the dividend tax rates, dividend income tax rates and income tax bands for the previous tax years. You can also use this website to help you find your tax code and calculate your dividend tax bill, dividend tax rates, and dividend tax credit.

Tax Free Allowance and National Insurance Contributions:

You do not need to pay National Insurance Contributions (NICs) on dividends.

Dividend Tax Calculation Examples:

Let's take a quick look at how £175,000 in dividend payments would be taxed in the 2023/24 tax year.  

Our example below assumes that your dividends are your only source of income.

• You will pay nothing for the first £500 (total income) due to the tax allowance.
• You will pay 8.75% (basic rate) for £12,571 - £50,270.
• You will pay 33.75% (higher rate) for £50,271 to £125,140.
• You will pay 39.35% (additional rate) for over £125,140

So, you would pay a dividend tax amounting to £48 099.

• £0 for the first £500 dividend income
• £2,662 for £1,001 - £50,270
• £35,912 for £50,271 -
• dividend income
• £150,000
• £9,525 for + £150,000 
• £48,099

That's a total tax rate of 27.4%.

The dividend allowance will lower your tax bill regardless of how much you earn in dividends.

Whether you earn £50 or £500,000 in dividends, you won't have to pay taxes on the first £500 in dividends.

There are two ways that you can pay dividend taxes.

The exact way that you pay them will depend upon how much you earned in dividends. Dividend taxes are due at the same time as your self-assessment tax return.

Pay Tax on up to £10,000 in Dividends

If you earned under £500 in dividends, you don't need to do anything or contact anyone.

But, for amounts between £501 and £10,000, you will have to do one of two things.

1. Help line: Contact the HMRC helpline
2. Self-assessment tax return (or online tax return): Use a Self Assessment tax return

Pay Tax on Over £10,000 in Dividends

Anything you earn over £10,000 requires you to fill out a Self Assessment Tax Return.

You don't have to pay any dividends on funds in an ISA or a pension. And, you can shelter up to £20,000 in an ISA - making them a unique part of modern share investing. 

Since the rule change in 2015, ISAs - which are tax-free savings/investment accounts - can hold up to £20,000 worth of stocks. And, any dividends that are accrued on shares held in your ISA aren't taxed.

Yes and no.

You will pay capital gains tax on shares from a sale, but you do not need to pay capital gains tax on shares held within an ISA or pension.