Dividend tax explained

HomeBanking › 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, you may be eligible to receive dividends, and as with most types of income, that means you’ll have to pay tax. The good news? Dividend tax is less than income tax. As we explain, you can also make your dividends work harder by investing the cash  into a competitive savings account to grow your wealth that little bit faster.

Key takeaways
  • Dividends: A dividend is a portion of a company’s earnings that is distributed to its investors or shareholders.

  • Tax rates: Dividend tax rates are different from income tax rates, although the rate you pay depends on which income tax band you’re in.

  • Dividend allowance: You can currently earn up to £1,000 in dividend income each year without paying tax.

What is dividend tax?

Dividends are the money you get from company profits if you’re a company shareholder, and dividend tax is simply the tax you’ll have to pay on these dividends. 

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

What is the dividend allowance?

Your dividend tax allowance is the amount you can earn tax-free from dividends. The dividend allowance in the UK for the 2024/25 tax year (6th April 2023 to 5th April 2024) 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.

What are the tax rates on dividends?

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 and additional-rate, depending on how much you earn.

How much tax do I pay on dividends in 2023/24?

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

Income tax bandAmount earned per year*Dividend tax rate
Basic rate£1 - £37,7008.75%
Higher rate£37,701 - £125,14033.75%
Additional rate£125,14039.35%
* The first £500 of dividend earnings is tax-free.

When do I need to pay dividend tax?

You must pay dividend tax before the end of every tax year, which traditionally runs from 6th April to 5th April. However, you’ll need to have a relatively large share portfolio, one which earns you over £2,000, before you have to start paying dividend tax. 

How do I pay dividend tax?

If you earn up to £500 in dividends, you won’t need to do anything because that’s your tax-free dividend allowance. 

If you earn dividends between £501 and £10,000, you’ll need to contact HMRC. If you fall into this bracket, 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.

There are various ways to pay the tax due on your dividends, including the following:

MethodHow long does it take? 
Online or telephone bankingThe same or next day 
CHAPSThe same or next day 
Bacs3 working days 
Debit cardThe same or next day 
Credit card (subject to charges)The same or next day 
Postal cheque 3 working days 
Direct debit 3-5 working days 
In person at the bank, building society or Post Office The same or next day 

Are there any tax-free dividends?

Yes, there is a legal way to avoid paying tax on dividends. If you choose to invest in a stocks & shares ISA you won’t pay income or capital gains tax on any returns you make on your investments.

How to make the most of your dividend payments

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 specific goals.

You might want to consider paying off a debt or a chunk of your mortgage, especially if you’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 tend to offer the most competitive rates of all account types and are ideal if you can afford to lock away a lump sum for a set period (typically between one and five years).