Dividend Tax UK: Rates, Allowances and How to Report
Introduction
If you receive dividends from UK or foreign companies, you may need to pay tax on them. Dividend income is taxed differently from employment or self-employment income, with its own allowance and tax rates.
This guide explains how dividend tax works in the UK, the current rates and allowances for 2025/26, and how to report dividend income on your Self Assessment tax return.
What Are Dividends?
Dividends are payments made by companies to their shareholders from company profits. You might receive dividends if you:
- Own shares in publicly traded companies
- Own shares in private companies
- Are a director-shareholder of your own limited company
- Hold shares through an investment fund that pays dividends
Dividends are paid from profits that have already been taxed at the company level (Corporation Tax), which is why dividend tax rates are lower than Income Tax rates on other income.
The Dividend Allowance
For the 2025/26 tax year, you can receive up to £500 in dividends tax-free. This is called the Dividend Allowance.
Recent changes to the allowance
| Tax year | Dividend Allowance |
|---|---|
| 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2024/25 | £500 |
| 2025/26 | £500 |
The allowance has been significantly reduced in recent years, meaning more people now pay tax on their dividend income.
How the allowance works
- Dividends up to £500 are tax-free
- The allowance does not reduce your taxable income for other purposes
- It uses up part of your basic, higher, or additional rate band
- The allowance applies to all dividend income combined (UK and foreign)
Dividend Tax Rates for 2025/26
Dividends above your allowance are taxed at these rates:
| Tax band | Dividend tax rate |
|---|---|
| Basic rate (income £12,571 - £50,270) | 8.75% |
| Higher rate (income £50,271 - £125,140) | 33.75% |
| Additional rate (income over £125,140) | 39.35% |
How tax bands work with dividends
Dividend income is treated as the top slice of your income. This means:
- Your other income (salary, self-employment, etc.) fills up your tax bands first
- Dividends are then added on top
- You pay the dividend rate corresponding to whichever band your dividends fall into
Example
If you have:
- Salary: £40,000
- Dividends: £15,000
Your dividends would be taxed as follows:
- £500 at 0% (dividend allowance)
- £9,770 at 8.75% (filling up the basic rate band to £50,270)
- £4,730 at 33.75% (in the higher rate band)
Dividends Within Your Personal Allowance
If your total income (including dividends) is within your £12,570 Personal Allowance, you pay no tax at all on your dividends.
This is common for:
- People with small shareholdings and no other income
- Retirees with modest dividend income
- Spouses receiving dividends from jointly-held shares
Dividends in ISAs and Pensions
Dividends received within these tax wrappers are completely tax-free:
- ISAs (Individual Savings Accounts) - No tax on dividends or growth
- Pensions - No tax while invested; taxed as income when withdrawn
- VCTs (Venture Capital Trusts) - Tax-free dividends if held for 5+ years
If you hold investments that pay dividends, holding them in an ISA can be a tax-efficient strategy.
How to Report Dividend Income
When you do not need to report
You do not need to report dividends if:
- Your dividends are within the £500 allowance, AND
- You have no other reason to file a Self Assessment return
When you must report via Self Assessment
You must report dividends on a Self Assessment tax return if:
- Your dividend income exceeds £10,000, OR
- You have untaxed income to declare (even if dividends are under £500), OR
- HMRC has asked you to complete a return
What information you need
To complete your tax return, gather:
- Dividend vouchers from each company
- Statements from your broker or share registrar
- Records of foreign dividends (in sterling)
Foreign Dividends
If you receive dividends from overseas companies, they are taxed in the same way as UK dividends.
Key points for foreign dividends
- Convert to sterling using the exchange rate on the date received
- You may be able to claim Foreign Tax Credit Relief if tax was withheld abroad
- Report foreign dividends in the Foreign section of your tax return
- Some countries have double taxation treaties with the UK
Director-Shareholders: Dividends vs Salary
If you own a limited company, you can pay yourself through a combination of salary and dividends.
Why dividends can be tax-efficient
- No National Insurance on dividends (unlike salary)
- Lower tax rates than Income Tax on salary
- You control the timing of dividend payments
Considerations
- You need sufficient company profits to pay dividends
- Dividends do not count toward pension contributions or state pension entitlement
- HMRC may challenge arrangements that appear to avoid tax unfairly
Common strategy
Many director-shareholders pay themselves:
- A small salary (around the NI threshold of £12,570)
- Additional income as dividends up to the higher rate threshold
- This combination minimises overall tax and NI
How QTax Helps
QTax supports you with dividend tax by:
- Calculating your dividend tax based on your total income
- Applying the dividend allowance correctly
- Ensuring dividends are taxed at the right rates within your tax bands
- Helping you report both UK and foreign dividends
FAQs
Do I pay National Insurance on dividends?
No, dividends are not subject to National Insurance contributions. This is one reason why dividend income can be more tax-efficient than salary for company directors.
Are dividends from my ISA taxed?
No, dividends received within an ISA are completely tax-free and do not need to be reported.
What if I receive dividends in a foreign currency?
You must convert foreign dividends to sterling using the exchange rate on the date you received them. Keep records of the exchange rate used.
Can I reduce my dividend tax bill?
You can reduce dividend tax by:
- Using your ISA allowance (£20,000 per year)
- Transferring shares to a spouse in a lower tax band
- Timing dividend payments across tax years if you control a company
Conclusion
Understanding how dividend tax works helps you plan your investments and, if you are a company director, structure your remuneration efficiently. With the reduced dividend allowance, more people now pay tax on their dividends, making it important to understand the rates and rules that apply.
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