What is the tax rate on dividend income?

Find out why shareholders who receive dividend payments are liable for tax and why taxes are levied on these funds. 

Summary

• Dividend payments are paid by a company to shareholders as a reward for owning shares.
• You will be taxed on dividend income in the same way that you are taxed on other income or earnings.
• The tax rate on dividend income depends on your tax band and increases accordingly. 
• The dividend allowance is £1,000 for the 2023-2024 tax year, but this can change annually.

What is dividend income?

Dividend income is paid out of a company’s profits to its respective shareholders. 

For example, if you own shares in a company and it makes a good profit, it may choose to reward its shareholders with dividend income in exchange for investing in their shares. 

As dividend income is indeed a form of income, it is taxed – and that is what dividend income tax is. All forms of income get taxed, and dividend income is no different. 

What is dividend income tax?

Dividends are an effective way to generate income from your investments. But like all types of income, they are subject to tax.

The tax rate on dividend income that each person has to pay depends on their tax band. The higher your tax band, the higher your dividend income tax will be. 

Income tax is used as a source of revenue for the government and is used to finance public services and provide essential infrastructure. It also helps regulate the amount of money people can earn in certain industries.

However, if the income you receive from dividends is under a certain amount, you may be able to receive it tax-free. This is called a dividend allowance, and it fluctuates year by year. 

The dividend allowance for the 2023-2024 tax year is £1,000, which will be cut to £500 from April 2024.

This is in addition to your personal tax allowance, which is £12,570 this tax year and can be used if your only income is from investments.

Learn more: what is the 60% tax trap and how can you legally avoid it?

How do I work out my dividend tax rate? 

The rate of dividend tax that you pay depends on the tax bracket that you fall in. 

To find out which tax bracket you fall into, you can use a dividend income tax calculator, which takes into account your gross income and dividend income in the current tax year. 

When is dividend tax payable? 

Dividend income tax is payable as soon as dividend income is distributed to shareholders.

You can pay these taxes at the same time that you pay other forms of tax—before the end of the UK tax year. 

If you fail to pay your dividend tax or pay it late, the government can issue you with a late payment penalty. 

How do I work out my dividend tax bill? 

If your dividend income is less than £1,000, you don’t need to pay dividend tax on it.

But if you have more than £1,000 of dividends coming in, you have to inform HMRC.

For example, let’s say you have dividends of £2,000. Due to the amount being over the £1,000 allowance, this falls into the taxable dividend income bracket.

Your dividend would then be taxed at a basic rate of 8.75% (if you’re a basic rate taxpayer), which would make your dividend income tax a total of £87.50. 

How do I avoid paying tax on dividends?

There are legal ways of avoiding tax on dividend income.

The easiest way to do this is by investing through an individual savings account (ISA), which is a tax-efficient savings account.

By opening an ISA, you can invest in stocks, or shares, or pay in cash that is free of capital gains tax, making it easier to receive your dividends without paying additional tax.

You can also open a Lifetime ISA, which can be used to save for your first home or retirement, or a Junior ISA to save for your child’s future. 

Want to learn more about tax?

If you are a shareholder or plan to be one in the future, knowing how to navigate tax on dividend income is crucial.

By understanding more about when and how to pay any taxes, you can avoid penalties, become more tax-efficient, and build your wealth more consistently over time. 

Unbiased can match you with a financial adviser who can offer expert guidance and other useful information about tax, investments, and more.