UK Dividend Tax Explained
For those interested in generating income from their investments, dividend stocks might be an attractive option. But before considering investing in such stocks, it’s important to remember that any dividend payments may be liable to tax in the UK.
In this article, we’ll take an in-depth look at UK dividend tax. We will highlight the different bands of dividend tax rates, demonstrate how to calculate dividend tax and much more!
Table of Contents
What Are Dividends?
Whilst we are probably all too aware of what taxation is, fewer people may be as familiar with the concept of dividend payments and the different forms which they can take. Dividends are the portion of a company’s earnings which it distributes amongst its shareholders, although it’s important to note that not all companies do this.
Types of Dividends
Typically, when people refer to dividends, they are talking about cash dividends, whereby the company in question distributes dividends to its shareholders in cash. However, there are a few other types of dividends which, whilst less common, it can help to be aware of.
Instead of paying a cash dividend to shareholders, companies may also opt to distribute a stock dividend. In this instance, a company will pay dividends to shareholders in the form of additional shares of the company’s stock.
A scrip dividend is where the company gives individual shareholders the option of either receiving a cash or stock dividend. Both stock and scrip dividends may be more common during challenging economic periods when companies are trying to preserve cash.
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How Is Dividend Tax Calculated?
How much dividend tax you will pay is based on your income tax band. As with income tax, you may pay more than one rate depending on your total income.
In order to calculate how much dividend tax you need to pay; you must add up your total income (i.e. salary + dividends + interest) to see what tax band your dividends fall into after wages have been taken into account. Dividends which fall into your personal allowance are not subject to dividend tax and, as previously noted, there is also a separate dividend allowance of £500.
Income tax bands for the tax year 24/25 are as follows:
Those who earn more than £125,140 do not receive a personal allowance.
Dividend Tax Rates
In the tax year 6 April 2024 – 5 April 2025, there is a dividend allowance of £500. Dividend income above the dividend allowance is taxable, the exact tax rate which you will pay will depend on which income tax band you find yourself in.
In the tax year 6 April 2024 – 5 April 2025, the three dividend tax UK bands are as follows:
Allowances and Exemptions
We have already noted that, in the tax year 24/25, there is a tax-free dividend allowance of £500. Furthermore, any dividends which fall into your personal allowance are not taxable.
There is also no dividend tax payable on stocks which are held within an Individual Savings Account (ISA). To learn more about ISAs and the current ISA allowance, check out the ISA page on the official government website.
Example of Calculating Dividend Tax
To understand how to calculate dividend tax, it is probably best to look at an example.
Let’s say somebody earns wages of £50,000 and receives £10,000 in dividends in the tax year 24/25. This results in a total income of £60,000. As per the table above, this means that some of this income will be taxed at the Higher Rate.
Dividend payments are taxed at the rate of whichever band they fall into after wages and the dividend allowance of £500 have been taken into account.
In our example, for the tax year 24/25, the total income of £60,000 should be taxed as follows (not accounting for National Insurance contributions).
Examples of Top UK Dividend Stocks
Whilst the UK’s FTSE 100 has not been renowned for its overall performance in recent years, it does have a reputation for containing a number of companies which are reliable dividend payers.
A few examples of some of the top dividend paying stocks in the FTSE 100 are:
British American Tobacco
Many tobacco companies have reputations for being generous dividend paying stocks and British American Tobacco is one such example. At the time of writing, the tobacco company has a trailing dividend yield of 8.8% and has increased its annual dividend for more than 20 consecutive years.
Diageo
A heavyweight in the alcohol industry, Diageo has also raised its annual dividend for more than 20 consecutive years and has a dividend yield of 3.1%.
Sage Group
Sage Group is a UK software company which specialises in accounting software. It also has a history of increasing dividends for more than 20 years and currently has a dividend yield of 2.0%.
The top dividend stocks are usually well-established companies, which generate fairly reliable earnings, allowing them to distribute a portion of these earnings amongst shareholders. However, it is important to remember that no matter how long a company has been paying dividends, future dividends are never guaranteed.
Conclusion
In the current tax year, there is a dividend allowance of £500, after which the amount of dividend tax UK investors will have to pay depends on their total income for the year. There are three different bands of dividend tax rates - a basic rate, a higher rate and an additional rate.
All tax-related figures in this article have been sourced from the official government website page regarding tax on dividends and are based on the current tax year 6 April 2024 – 5 April 2025. Please note, this article has been written for information purposes only; if you require tax advice, you should speak to a tax specialist.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
