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If you hold shares in any profitable company, there’s a good chance you’ll receive a dividend payment every now and then.
Dividends are paid out of company profits and are typically divided among shareholders in recognition of the company’s success.
The great thing about dividends is that they can be a form of passive income – allowing you to earn money without putting in any ongoing work.
The bad news is that since dividends count as income, you have to pay tax on them. Read on to get clued up about how dividend taxes work, what the rates are, and when you have to pay.
What is dividend tax?
Once you pull in a certain amount of money, the government will want its cut. That applies not only to salaries but also to other income, including investment gains.
When you own shares in a company and you are paid a portion of company profits in the form of a dividend, HM Revenue & Customs (HMRC) will normally expect you to declare and pay tax on it.
Dividend tax is simply the specific tax applied to dividends.
» MORE: About paying tax
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How are dividends taxed?
Anyone making less than £100,000 can currently earn up to £12,570 each fiscal year without paying any tax on their income. This is called your personal allowance.
Dividends can count towards your personal allowance, provided your personal allowance hasn’t already been exhausted by other income streams, such as a salary or pension. This means that if the only income you receive from April to April is dividends and it totals less than £12,570, then you don’t owe the taxman anything.
Every year, the government also grants investors an additional tax-free dividend allowance.
The dividend allowance used to be a fair bit higher, but in the 2024/2025 tax year, the dividend allowance was cut to £500.
As of April 2025, the dividend allowance remains at £500.
You can only use this allowance to shield your dividend income from tax (unlike the personal allowance – which can be used for most kinds of income).
You will then pay dividend tax on any dividend income above your allowances.
How much is dividend tax?
Dividend tax rates are based on your overall earnings and what type of UK taxpayer band your income falls into: basic rate, higher rate, or additional rate.
As of April 2025, the following dividend tax rates apply to investors in the UK:
- Basic rate (income between £12,571 and £50,270) – 8.75% dividend tax rate
- Higher rate (income between £50,271 and £125,140) – 33.75% dividend tax rate
- Additional rate (income above £125,140) – 39.35% dividend tax rate
Scotland has its own distinct income tax bands, but dividend tax in Scotland is the same as in the rest of the UK.
If you live in Scotland, check which of the above UK-wide tax bands your income falls into, and you’ll owe dividend tax accordingly.
To work out your tax band, add dividend takings to all other sources of taxable income.
For example, if you earned £29,570 in wages and £3,000 in dividends in a single tax year, your total income would be £32,570.
Your personal allowance of £12,570 would be deducted from this, leaving £20,000 subject to tax.
This income sits in the basic tax band which means that you’d pay:
- 20% tax on £17,000 of wages
- 0% tax on £500 of dividends (because of the allowance)
- 8.75% tax on the £2,500 worth of dividends over the allowance
Dividends enter the equation only after tallying up income from work, pensions, property, and then interest on savings accounts.
As our dividend tax example shows, coming last is generally a good thing because these payments are subject to lower taxation than other sources of income.ted, coming last is generally a good thing because these payments are subject to lower taxation.
» MORE: About income tax
How do I pay tax on dividends?
If you pocket more than £500 in dividends in any one tax year, you’ll need to let HMRC know.
For returns of £10,000 or less, you can ask HMRC to adjust your tax code so that the money is taken directly from your wages or pension.
That option disappears when annual dividend income exceeds £10,000.
In such cases, the only available path is to file a separate self-assessment tax return.
How to avoid tax on dividends
Luckily, there just so happens to be a legal way to significantly reduce or completely wriggle out of paying dividend tax: investing through a stocks and shares ISA. All UK residents over 18 can deposit up to £20,000 each year into these accounts, with any funds held within them shielded from dividend and capital gains tax obligations.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk.
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