Dividend tax explained

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 – though dividend tax rates are lower than income tax rates. 

Everyone gets an annual dividend tax-free allowance, so you only have to pay tax on dividend income that exceeds this.

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.

How much tax do I pay on dividends in 2024-25 and 2025-26?

The rate of dividend tax you pay depends on your tax band:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

In the 2025-26 tax year, you won't need to pay any tax on the first £500 of dividend income you receive. This is called the tax-free dividend allowance. This was cut from £1,000 in 2023-24. 

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 £500 dividend allowance, you could earn another £12,570 tax-free in 2025-26 (the same as in 2024-25). 

You don't pay dividend tax on any shares, funds or trusts held in a stocks and shares Isa.

You can also use our dividend tax calculator to work out your potential tax bill.

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When is dividend tax payable?

The £500 allowance means that you'll need a relatively large portfolio outside your Isa before you'll start paying the dividend tax.

Dividends 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 £20,000 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 transfer shares into your Isa to avoid paying tax in the future.

Which dividend tax rates will I pay?

Your dividend tax rate will depend on your income tax band from all income you receive in a year. 

• If you earn less than £12,570, this falls within your personal allowance and you won't pay any tax.
• Income between £12,570 and £50,270 makes you a basic-rate taxpayer.
• Income between £50,270 and £125,140 makes you a higher-rate taxpayer.
• Income above £125,140 makes you an additional-rate taxpayer.

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

• Find out more: UK income tax rates 2024-25 and 2025-26 

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.

For example, if you received £45,000 from a job and then £9,000 from dividends, your tax bill would breakdown like this:

• First £12,570 of your employment income falls within the personal allowance. Tax bill: £0
• Remaining £32,430 is taxed at the 20% basic rate. Tax bill: £6,486
• First £500 of dividend income falls within the dividend allowance. Tax bill: £0
• Next £4,770 of dividend income (what's left of your basic-rate threshold for income tax) taxed at the 8.75% dividend tax basic rate. Tax bill: £417.38 (rounded up)
• Remaining £3,730 of dividend income taxed at the 33.75% dividend tax higher rate. Tax bill: £1,258.88 (rounded up)
• Total tax bill: £8162.26, made up of £1676.26 dividend tax and £6,486 income tax. 

If you've made capital gains, any capital gains tax 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.

If you earn up to £500 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 £500 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 an online tax return or paper tax return.

• Tackle your 2024-25 tax return with the tax calculator service from GoSimpleTax. It can help you to tot up your tax bill, get tips on where to save and submit your return directly to HMRC.

Do I pay dividend tax on equity investment funds?

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

So for holdings in investment funds or investment trusts, 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. Since April 2017, tax hasn't been 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: are you ready to invest?

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 a capital gains tax (CGT).

Much like dividends, you get an annual tax-free allowance on capital gains. In 2025-26, this is £3,000 – the same as 2024-25.

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 18% if you're a basic-rate taxpayer, or 24% if you're a higher or additional-rate taxpayer.

Find out more: capital gains tax on shares