What are the Dividend Tax Rates?
If you own shares and receive income in the form of dividends it’s important to understand the tax implications.
While dividends can be an excellent source of regular income from running your own limited company or other investments they are subject to a different tax rate compared to income from work or pensions.
The tax rate on dividends depends on the tax band your income falls into:
- Basic rate taxpayers pay 8.75% tax on dividends.
- Higher rate taxpayers pay 33.75% tax on dividends.
- Additional rate taxpayers pay 39.35% tax on dividends.
What is the tax free dividend allowance?
All individuals are entitled to a tax free dividend allowance regardless of their tax bracket worth £500 per tax year.
As an example in the 2024/2025 tax year you won’t have to pay any tax on the first £500 of dividend income.
You can use the dividend allowance in addition to your personal allowance to increase the amount of tax free income you have.
As an example if your personal allowance was £12,570 you can add the dividend allowance to it giving you a total of £13,070 to offset against your dividend and any other taxable income.
For additional rate taxpayers (earning over £125,140 in the 24/25 tax year) no dividend allowance is available so income tax is payable on the full dividend received.
The government does change the tax free dividend allowance and has typically reduced its value over the years.
Can you carry forward the dividend allowance?
You are unable to transfer any unused dividend allowance forwards (or backwards) to use in a different tax year.
Can you transfer unused dividend allowances?
Transferring the dividend allowance to your spouse (in the same way as the personal allowance) isn’t possible.
A practical strategy to reduce dividend tax that’s worth considering is to transfer dividends to your spouse if one partner is in a lower tax bracket than the other.
How do I report dividend income to HMRC?
Dividend tax isn’t deducted before being paid unlike income from a PAYE source like your pension or salary.
HMRC expects you to declare any dividend income over the dividend allowance so an appropriate level of income tax can be collected.
There are two ways to pay dividend tax which depend on the value of the dividends received and if you complete a self assessment tax return.
Dividends and self assessment:
If you complete a self assessment tax return you should enter your dividend income figure in the interest and dividends section of your tax return.
HMRC will automatically apply your dividend and personal allowances as part of the tax return completion process.
Tax payable on dividends will form part of your overall self assessment tax bill and confirmed by HMRC after they receive your completed tax return.
Dividends and your tax code:
For individuals who don’t complete a self assessment tax return in receipt of dividend income greater than the dividend allowance you can ask HMRC to adjust your tax code.
Adjusting your tax code is only possible if you have taxable PAYE income and means that the dividend tax you owe is automatically deducted (weekly or monthly) from your wages or pension income.
If your savings and investments combined earn you more than £10,000 in any one tax year you’ll need to register for self assessment and complete a tax return which includes your dividend income.
What are the income tax rates?
The income tax rates are very different from the dividend tax rates.
Knowing the rate or rates at which you pay tax on your income is essential because they determine the percentage of tax paid on dividends.
The tax rate(s) you pay are based on the level of your taxable income and they increase depending on which tax band(s) your income falls into.
| Income Tax Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate tax | £12,571 to £50,270 | 20% |
| Higher rate tax | £50,271 to £125,140 | 40% |
| Additional rate tax | over £125,140 | 45% |
Personal savings allowance
The government gives all individuals a tax free savings allowance also known as the personal savings allowance.
In the 24/25 tax year for basic rate taxpayers the PSA is valued at £1000 per tax year and £500 for higher tax taxpayers.
Your personal savings allowance (PSA) can be used against income from savings and in addition to the dividend and personal allowances.
Personal allowance and the dividend allowance
The tax free personal allowance is accessible by the majority of UK resident individuals in the United Kingdom.
The basic personal allowance is worth £12,570 (for the 23/24 tax year) and is used to decrease the portion of your income that is subject to income tax.
Importantly you can add the dividend allowance to your personal allowance to increase your total non taxable income.
It’s helpful to stay informed about any potential changes to the value of tax free allowance (which the government can change periodically) as these adjustments might impact you in the future.
