Reviewed by Connor Masters ATT, Senior Tax Specialist at RIFT Tax Refunds

Dividend tax is the tax you pay on income received from dividends, which are payments made by companies to their shareholders from profits. If you own shares and receive dividends, you may need to pay dividend tax depending on the amount and your income tax band.

In the UK, dividend tax rates are generally lower than standard income tax rates, making dividends a potentially more tax-efficient income source. The tax is calculated after considering your personal allowance and other income sources.

For 2024/25, you can earn up to £500 in dividends tax-free; beyond this, dividend tax rates apply based on your income band.

Dividend tax rates in 2024/25 - summary

  • Basic rate taxpayers pay 8.75% on dividends
  • Higher rate taxpayers pay 33.75%
  • Additional rate taxpayers pay 39.35%

You also have a tax-free dividend allowance of £500. This means the first £500 of dividend income is tax-free, with the rates above applying to any dividends over this amount.

These rates are designed to make dividends a tax-efficient way of receiving income compared to standard earnings.

What is the dividend allowance in 2024/25?

The dividend allowance is the amount of income you can earn from dividends before paying any tax. For the 2024/25 tax year, the dividend allowance is £500, reduced from £1,000 in the previous year.

This means you can earn up to £500 in dividend income tax-free. Any dividends above this threshold will be taxed according to your tax brackets. This reduction in allowance highlights the importance of careful financial planning if you rely on dividends for income.

How to calculate tax on dividends

To calculate tax on dividends, follow these steps:

1) Determine your total dividend income

2) Subtract the dividend allowance (£500 for 2024/25)

3) Apply the appropriate tax rate based on your income tax band

Example
Let’s say you receive £2,500 in dividends and are a basic rate taxpayer. This is your dividend tax calculation:

  1. Dividend income: £2,500
  2. Subtract the allowance: £2,500 - £500 = £2,000
  3. Apply the basic rate (8.75%): £2,000 × 8.75% = £175

So, you would pay £175 in dividend tax.

Paying tax on dividends

If your dividend income is up to £10,000, you have options for paying tax. You can contact the HMRC helpline, request HMRC adjust your tax code or complete a Self Assessment tax return. This allows the tax owed to be deducted from your salary or pension automatically.

However, if your dividend income exceeds the dividend tax threshold of £10,000, you must complete a Self Assessment tax return. This process involves reporting your total income, calculating the tax owed, and making any necessary payments directly to HMRC. It’s important to keep accurate records and meet deadlines to avoid penalties.

Need help with your tax returns?

RIFT Refunds can assist with your tax return, including if you’re a high earner! Our helpful and friendly team can handle the entire process for you.

We’ll start by calculating your total taxable income, ensure all relevant deductions and allowances are applied, and file your return accurately and on time.

Our expertise in managing complex tax situations ensures you comply with tax regulations. Let us take the stress out of tax season so you can focus on what you do best.

Dividend tax rates - FAQs

Do I need to report dividend income to HMRC?

You need to report dividend income to HMRC if it exceeds the dividend allowance, which is £500 for 2024/25. If your total income, including dividends, requires a Self Assessment tax return, you must include dividend income there. Even if it doesn’t exceed the allowance, accurate reporting can help to avoid potential future issues.

Does tax on dividends from investments work differently?

Tax on dividends from investments is subject to specific rates and allowances. For 2024/25, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate), above the £500 allowance.

How often do dividend tax rates change?

Dividend tax rates and allowances can change annually with the government's budget announcements. Typically, updates are made in April each year, aligning with the start of the new tax year. It's important to stay informed about these changes to accurately plan and manage your tax affairs.