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Dividend tax

Find out how much tax you'll pay on dividend income from shares and how the 2018 dividend tax changes work.

In this article
What is dividend tax? Video: dividend tax explained How much tax do I pay on dividends in 2018-19 and 2019-20? Will the dividend allowance increase my tax bill? When is dividend tax payable? Which dividend tax rate will apply to me?
How do I work out my dividend tax bill? How do I pay my dividend tax bill?  Do I pay dividend tax equity investment funds? Do I pay capital gains tax on shares? Tax on dividends earned before April 2016

What is dividend tax?

If you own shares in a company, there are two ways you can earn money: from selling the shares if they grow in value, or from dividends paid by the company if it chooses to distribute profits to shareholders.

Dividends can be a great way to generate a regular income from your investments. But, as with any income you earn, you may have to pay tax. 

The good news is that income tax on dividends is lower than the rate you’ll pay on money from work or a pension. You can also use your tax-free dividend allowances, meaning you can earn more income from your investments before you’ll start paying tax.

This guide explains everything you need to know about dividend tax - how to work out your bill, how much you'll pay, and how dividend tax has changed.

Video: dividend tax explained

Our video below explains how dividend tax works and when you'll pay it.

How much tax do I pay on dividends in 2018-19 and 2019-20?

In both the 2018-19 and 2019-20 tax years, you won’t need to pay any tax on dividend income on the first £2,000 you receive. This is called the tax-free dividend allowance.

The allowance was cut from £5,000 in the 2017-18 year. This means if you’re filing your taxes for the 2018-19 tax year (which runs between 6 April 2018 and 5 April 2019) you’ll receive the lower allowance for the first time. 

Above this dividend income tax-free allowance, you pay tax based on the rate you pay on your other income - known as your 'tax band' or sometimes called your 'marginal tax rate'. 

It’s also possible to avoid tax on your investment income if you hold your shares or funds in a stocks and shares Isas.

If your only income is from investments, then you can also use your tax-free personal allowance before you start paying tax on dividends.

So on top of the £2,000 dividend allowance, you could earn another £11,850 in 2018-19 and £12,500 tax-free in 2019-20.

The table below shows the different dividend tax rates for basic, higher and additional-rate taxpayers.

Income tax band Dividend tax rate
Basic-rate 7.5%
Higher-rate 32.5%
Additional-rate 38.1%

Will the dividend allowance increase my tax bill?

If your dividend income is more than £2,000, you’ll probably pay more tax because of the cut to the dividend allowance.

People who receive more than £5,000 from dividends will be hit the hardest, with £3,000 more of their income subject to tax. The increase in your tax bill depends on what rate of tax you pay.

For someone receiving £5,000 or more in dividends (outside an Isa):

  • A basic-rate taxpayer would see their dividend tax bill increase by £225
  • A higher-rate taxpayer would see their dividend tax bill increase by £975
  • An additional-rate taxpayer would see their dividend tax bill increase by £1,143

Use our 2018/19 dividend tax calculator to work out how much tax you'll pay. You can also use our dividend tax calculator 2019/20 to work out your potential tax bill for the current tax year. 

 

When is dividend tax payable?

The £2,000 allowance means you’ll need a relatively large portfolio outside your Isa before you’ll start paying the dividend tax.

Dividends from shares and funds aren’t guaranteed, and the amount you receive will depend on how much profit the companies you are investing in make, and how much they pass on to shareholders.

A share generating a relatively healthy profit might yield a 5% income – if it did, you would need investments worth more than £40,000 before your dividends start to be taxed.

If you’re earning more from your investments, or expect to grow your investments by adding to them, you can transfers shares into your Isa to avoid paying tax in the future.

Which dividend tax rate will apply to me?

The general rule is that your tax rate depends on how much income and capital gains you’ve received in any given year.

In the 2018-19 tax year

  • If you get less than £11,850, this falls within the personal allowance and you won’t pay any tax.
  • Income between £11,850 and £46,350 is in the basic-rate tax bracket
  • Income between £46,350 and £150,000 is in the higher-rate tax bracket
  • Income above £150,000 is in the additional rate tax bracket.

In the 2019-20 tax year

  • If you get less than £12,500, this falls within the personal allowance and you won’t pay any tax.
  • Income between £12,500 and £50,000 is in the basic-rate tax bracket
  • Income between £50,000 and £150,000 is in the higher-rate tax bracket
  • Income above £150,000 is in the additional rate tax bracket.

To complicate things further, you’ll start to lose £1 of the personal allowance for each £2 you earn over £100,000.

The principle is the same in Scotland, though the Scottish tax bands and rates are slightly different.

How do I work out my dividend tax bill?

When working out how much tax you pay, HMRC will 'stack' your income, first counting your income from work and pensions and property, then your savings income, and then your dividend income.

If you’ve made capital gains, that gets calculated after your income tax.

This is important – and works in your favour – because it generally means the dividends, rather than other income, will be taxed at the highest rate. As tax on dividends is lower than other income, this could reduce your tax bill overall.

For example, if you received £40,000 from a job, and then £12,000 from dividends, your tax bill would breakdown like this:

 

Dividend tax in 2018-19

 

Employment income:

  • £11,850 tax free (from your personal allowance): £0  
  • £28,150 taxed at the 20% basic rate (the remainder): £5,630

Dividend income: 

  • £2,000 tax free (from the dividend tax-free allowance): £0
  • £4,350 (what's left of your basic-rate threshold) taxed at the 7.5% basic rate*: £326
  • £5,650 taxed at the 32.5% higher rate: £1,836

So your total tax bill would come to £7,792.

 

Dividend tax in 2019-20

 

Employment income:

  • £12,500 tax free (from your personal allowance): £0  
  • £27,500 taxed at the 20% basic rate (the remainder): £5,500

Dividend income: 

  • £2,000 tax free (from the dividend tax-free allowance): £0
  • £8,000 (what's left of your basic-rate threshold) taxed at the 7.5% basic rate*: £600
  • £2,000 taxed at the 32.5% higher rate: £650

So your total tax bill would come to £6,750

How do I pay my dividend tax bill? 

If you earn up to £2,000 in dividends, you don't need to do anything. No need to inform HMRC, just enjoy your dividend income as you see fit.

But if you earn between £2,000 and £10,000, you'll need to tell HMRC. You can pay the tax due in one of two ways: have HMRC adjust your tax code, so that the tax is taken from your salary or pension; or by filling out a self-assessment tax return.

If you earn more than £10,000 in dividends, you'll need to complete a tax return

  • Get a head start on your 2018-19 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?

Do I pay dividend tax equity investment funds?

Dividend taxes don't just apply to income from shares. You'll also have to pay it on income you get from funds that invest in shares on your behalf. 

So for holdings in mutual funds, such as investment trusts, unit trusts and open-ended investment companies (Oeics), you'll need to pay the dividend tax if they are investing in equities

But if you hold bond funds, which effectively lend to companies and governments by buying their debts, that income counts as interest, and will be taxed as savings income

Higher- and additional-rate taxpayers need to declare interest payments from bonds funds on their tax return. From April 2017, tax isn't deducted at source so you'll receive the money before tax has been collected. 

These taxes only apply to income from your investments - if the value of your stake in the fund, shares or bonds you hold increase , you may need to pay capital gains tax on those profits. 

Find out more: how to invest - the basics 

Do I pay capital gains tax on shares?

When you come to sell your shares, you could pay tax on any profits you make. This would be capital gains tax (CGT). 

Much like dividends, you get an annual tax-free allowance on capital gains. In 2018-19, this was worth £11,700. In 2019-20, the CGT allowance is £12,000. 

If the profit you make when selling your shares is below this amount, you won't have to pay tax. 

Above this level, gains are taxed at 10% if you're a basic-rate taxpayer, or 20% if you're a higher- or additional-rate taxpayer. 

Find out more in our guide to capital gains tax on shares.

Tax on dividends earned before April 2016

Before April 2016, dividends were 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 had dividends paid in cash. The 10% deduction resulted investors being given a tax credit. This meant that:

  • Basic-rate taxpayers had no further tax to pay. 
  • Non-taxpayers also had this tax deducted and couldn't claim it back. 
  • 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%.

But how did this 'effective tax rate' work?

For every £90 in dividends a higher-rate taxpayer received, they were given a £10 tax credit, which makes a 'gross' dividend of £100. 

Applying the rate of 32.5% to £100 gave £32.50 tax due. But this was reduced by £10 - the amount of the tax credit - to give a remaining liability of £22.50. 

As a percentage of the £90 received, £22.50 is 25%, so this was the effective rate of tax the shareholder actually pays. 

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