Dividend tax explained

Dividends are payments 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. So what exactly is dividend tax, how does it work and what are the dividend tax bands?

Dividend taxDividend taxDividend 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 2020/21 tax year (6th April 2020 to 5th April 2021) is £2,000. This allowance is in addition to your personal allowance of £12,500. That means you can earn a total of £14,500 in tax-free allowances; £12,500 from your personal allowance and £2,000 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.

As you can see from the map below, the UK has amongst the highest dividend tax rates in Europe:

Dividend tax rates in EuropeDividend tax rates in EuropeDividend tax rates in Europe

How much tax do I pay on dividends in 2020/21?

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 band Amount earned per year* Dividend tax rate
Basic rate £14,500 to £50,000 7.5%
Higher rate £50,001 to £150,000 32.5%
Additional rate £150,001+ 38.1%

* The first £2,000 of dividend earnings is tax-free.

UK dividend tax rates and thresholds 2021/22UK dividend tax rates and thresholds 2021/22UK dividend tax rates and thresholds 2021/22

How do I work out my dividend tax?

Let’s say you earn £60,000 a year. You’d work out your dividend tax in the following way:

  • £12,500 of your earnings are tax-free, as that’s your personal allowance
  • Another £2,000 is tax-free, which is your dividend allowance

That leaves £45,500 of taxable dividends.

  • £35,500 of that is taxed at 7.5%, as it takes you up to £50,000 of your income
  • The remaining £10,000 is taxed at 32.5%   

As with income tax, you’ll pay tax in more than one dividend tax band.

If you earn a wage as well as dividends, your calculation will look slightly different. For example, if you earn £58,000 in wages and £2,000 in dividends, you won’t pay any tax on your dividends, but you will pay income tax on your wages. If you earn £57,000 in wages and £3,000 in dividends, you’ll be taxed on £1,000 of those dividends, and you’ll have to pay income tax on your wages.

Dividend tax just applies to the dividends you earn. Don’t forget that you also might need to pay tax on other types of income, such as any interest you earn on savings

Additionally, if you earn over £100,000 per annum, your personal allowance reduces by £1 for every £2 you earn. This means that if you earn £125,000, you won’t be eligible for a tax-free personal allowance.

Calculating dividend tax when you earn a salary

Let’s say that Hannah earns £30,000 per annum in wages and £15,000 in dividends, a combined total of £45,000. 

Hannah can deduct her £12,570 personal allowance from her wages, with the remaining £17,430 subject to the 20% tax rate.  

Hannah’s first tax payment will be £3,486. 

The £15,000 earned from dividends will be reduced by £2,000 thanks to the dividend allowance. This leaves her with £13,000 in dividends subject to tax at a rate of 7.5%, as she’s a basic rate taxpayer. 

The tax payable on her dividends is £975. 

Hannah’s combined total income after both taxes is £40,539.

Calculating dividend tax when you only earn dividends

If dividends are your only source of income, the calculation will be slightly different. 

For example, James earns £50,000 per annum solely through dividends. 

After subtracting his personal allowance of £12,570 and dividend allowance of £2,000, he is left with £35,430 in taxable income. 

This amount puts James in the basic rate tax band, which is 7.5% on dividends, meaning his total tax bill will be £2,657.25.

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 £2,000 in dividends, you won’t need to do anything because that’s your tax-free dividend allowance. 

If you earn dividends between £2,001 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:

Method How long does it take?
Online or telephone banking The same or next day
CHAPS The same or next day
Bacs 3 working days
Debit card The 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

Examples of dividend tax bills

The standard formula on dividend tax depends on two things: 

  • Any wages you earn (if you earn over £125,000, you won’t benefit from a personal allowance) 
  • How much you have earned in dividends 

When working out how much tax you need to pay, HMRC will ‘stack’ your income in this order: 

  1. Income from work, pensions and property,
  2. Income from savings 
  3. Dividend income

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.

Dividend tax before April 2016

Tax on dividends in the UK has been subject to some fairly recent changes. For example, If you had dividends before April 2016, they will have been taxed differently. 

Any dividends you earned were deemed to have been taxed at 10% before they were paid to you. This was regardless of whether you chose to reinvest them or were paid your dividends. This deduction resulted in investors being given a tax credit. 

This meant that:

  • Non-taxpayers, such as those earning a low income, also had this tax deducted and couldn’t claim it back 
  • Basic-rate taxpayers had no further tax to pay 
  • Higher-rate taxpayers paid dividend tax at 32.5% – but after the tax credit, this became an effective tax rate of 25%
  • Additional-rate taxpayers paid dividend tax at 37.5% – but after the tax credit, this became an effective tax rate of 30.6%


* https://www.gov.uk/tax-on-dividends

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