Dividend tax explained

Dividends are payments (usually cash) made by a company to their shareholders to share the profit they have made over a certain period. They are typically paid regularly, and they are one way investors can earn a return when investing in stocks.

If you own shares in a company or have invested in other instruments such as ETFs, you may be eligible to receive dividends. As with most types of income, that often means you’ll have to pay tax, though there could be ways to reduce or remove tax liabilities. If you do have to pay it, dividend tax is less than income tax. You can also potentially make your dividends work harder by putting the cash into a competitive savings account.

A dividend is a payment made by a corporation to its shareholders. It represents a share of the profits the company has generated. When you invest in stocks, receiving a dividend is one way to earn a return on your investment, in addition to capitalising on growth if the share price rises.

If you earn dividends, then dividend tax is simply the tax you’ll have to pay on them.

Dividend tax rates are different from (and lower than) income tax rates, and you’ll also get a tax-free dividend allowance.

A portion of your earnings from dividends is tax free, known as the dividend tax allowance. The dividend allowance in the UK for the 2026/27 tax year (6th April 2026 to 5th April 2027) is £500. 

This allowance is in addition to your personal allowance of £12,570. That means you can earn a total of £13,070 in tax-free allowances; £12,570 from your personal allowance and £500 from your dividend allowance.

After this, you’ll pay dividend tax, which falls into three different tax rates, just like income tax.

The dividend allowance has changed frequently in recent years. In the 2022/2023 tax year, you could earn up to £2,000 tax-free. In the 2023/24 tax year, the dividend allowance was cut in half to £1,000. In 2024/25, the allowance was halved again to the current amount of £500.

The amount you pay in tax on your dividends depends on your tax band, which is determined by your personal income. You’ll fall into one of three different tax band rates; basic-rate, higher-rate or additional-rate, depending on how much you earn. To find out your income tax band, you simply add your dividend income to your other income, like your salary.

Once you earn more than your personal allowance and your dividend allowance, you’ll be taxed on your dividends over the £500 allowance according to the following tax bands:

You are responsible for calculating your dividend income, and if it’s over the £500 allowance, you’ll need to declare it to HMRC and pay the tax due. You may want to use a dividend calculator to help you. 

You can pay dividend tax* in two different ways, either by asking HMRC to adjust your tax code, so your dividend tax is automatically taken from either your salary or your pension, or by completing a self-assessment tax return. If you earn dividends of more than £10,000 per year, you’ll need to complete a self-assessment tax return.

The deadlines for paying your tax bill are usually:

• 31 January for any tax you owe for the previous tax year (known as a balancing payment) and your first payment on account
• 31 July for your second payment on account

If you choose to invest in a stocks & shares ISA, you do not pay income tax or capital gains tax on any returns you make. Any dividends paid into your ISA are exempt from dividend tax and do not count towards your annual dividend allowance. 

Dividend income is taxed at a lower rate than a standard salary. Another key difference is that your employer automatically deducts standard income tax from your wages through the Pay As You Earn system. You are responsible for declaring your dividend income and paying the tax directly to HMRC.

No. Dividends are exempt from National Insurance contributions. This is one reason why some business owners choose to pay themselves a combination of a lower salary and higher dividends.

If you’re fortunate enough to receive a dividend payment, you may be wondering how best to use the extra money. Naturally, the most appropriate course of action will depend on your individual financial circumstances and specificgoals.

Some choose to use their dividend income for paying off a debt or a chunk of their mortgage, especially if they're paying a high interest rate. Alternatively, you may choose to invest your dividend payment into a competitive savings account like a fixed rate bond. 

Fixed rate bonds often offer competitive rates if you can afford to lock away a lump sum for a set period (typically between one and five years), but bear in mind that you cannot access your funds during the term and inflation may impact the real value of your returns.