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UK Dividend Tax Rates 2023/2024
A quick explainer on tax rates for UK dividends, including the tax-free allowance on investment income. For 2023 and 2024, rates have been reduced per British government policy.
Disclaimer: Tax treatment depends on your individual circumstances and ISA regulations which may change.
Disclaimer: Tax treatment depends on your individual circumstances and ISA regulations which may change.
Big ideas
- Dividends are corporate payouts to shareholders and, as a form of income, are subject to tax.
- Dividends are tax-free up to a certain amount. They are also tax-free if under the personal allowance of £12,570, provided you have no other form of income.
- The UK HMRC has reduced the tax-free dividend allowance to £1,000 from April 6, 2023, and to £500 from April 6, 2024.
EXAMPLE
Let’s look at a typical scenario (maybe you?)
- An employee
- Eligible to pay tax on their income
- Works at a UK business
- Owns some dividend-paying stocks
This person should have at least £13,570 in deductions.
That comes from the £12,570 personal allowance + £1,000 dividend allowance.
- An employee
- Eligible to pay tax on their income
- Works at a UK business
- Owns some dividend-paying stocks
This person should have at least £13,570 in deductions.
That comes from the £12,570 personal allowance + £1,000 dividend allowance.
Certain corporations are well known for paying out dividends to shareholders. This makes these companies very appealing to a specific class of investors, often linked with dollar cost averaging, to compound returns and reduce volatility. This is a long-term approach proven to be effective.
But almost any form of income is subject to tax in the UK. The tax authority in the UK, known as Her Majesty’s Revenue and Customs (HMRC), has reduced the 2023 tax-free dividend allowance from £2,000 to £1,000 starting on April 6, 2023. From April 6, 2024, this allowance will be reduced further to £500.
But almost any form of income is subject to tax in the UK. The tax authority in the UK, known as Her Majesty’s Revenue and Customs (HMRC), has reduced the 2023 tax-free dividend allowance from £2,000 to £1,000 starting on April 6, 2023. From April 6, 2024, this allowance will be reduced further to £500.
Dividends are taxable regardless of whether you utilise a dividend reinvestment program (DRIP) or sell them for cash. However, the basic tax rate for this type of investment income relative to regular income is quite low at 8.75%, even if the tax-fee deduction is lower than what it used to be.
What are the dividend tax rates in the UK?
Dividend tax rates in the UK are based on how much you earn. In other words, different tax rates depend on your income, and specific segments of payments will have different tax rates. You’ll pay 8.75% between £12,571 – £50,270, 33.75% between £50,271 – £125,140, and 39.35% from £125,140 upwards.
These three tax brackets are known as the basic rate, higher rate, and additional rate, respectively, with a personal tax allowance of up to £12,570.
These three tax brackets are known as the basic rate, higher rate, and additional rate, respectively, with a personal tax allowance of up to £12,570.
Rate of Taxation | Thresholds | 2023/2024 Dividend Rate |
Personal Allowance | £0 – £12,570 | 0% |
Basic Rate | £12,571 – £50,270 | 8.75% |
Higher Rate | £50,271 – £125,140 | 33.75% |
Additional Rate | £125,140 upwards | 39.35% |
EXAMPLE
Hypothetically speaking if you did not work and earned £150,000 in dividends for 2023/24, you’d pay a total of £42,504.66 in tax:
- You would pay £3,211.25 at the basic rate.
- £29,511 at the higher rate and £9,782.41 at the additional rate.
- You would pay nothing on the first £12,570.
- An additional £1,000 is tax-free.
If you only worked and earned £150,000 from employment income (without a dividend income), the overall tax burden would be more. That’s because dividend tax rates are cheaper than income tax rates.
- You would pay £3,211.25 at the basic rate.
- £29,511 at the higher rate and £9,782.41 at the additional rate.
- You would pay nothing on the first £12,570.
- An additional £1,000 is tax-free.
If you only worked and earned £150,000 from employment income (without a dividend income), the overall tax burden would be more. That’s because dividend tax rates are cheaper than income tax rates.
Note that your personal tax allowance can be increased if you claim a marriage allowance. You might also be able to claim tax-free allowances of £1,000 from self-employment or rental property deductions.
How to calculate the tax on dividends: further examples
Calculating tax on dividends in the UK is relatively straightforward.
Here is a simple process to follow:
1. Add your total dividends and see what tax rates apply, along with deductions. Different tax rates apply to different brackets (personal allowance, basic, higher, and additional).
2. If your only income for the 2023/2024 tax year is a dividend worth £13,570, then you will not have to pay any taxes on it. This is because you have a £1,000 dividend allowance alongside a £12,570 personal allowance.
3. If your dividend for the 2023/2024 tax year is £120,000, you will not pay any tax on the additional rate. Instead, only the personal allowance, basic, and higher tax brackets will apply.
4. The situation gets a little more complex in the standard case, where you have an income and a dividend. You need to calculate income taxes and dividend taxes separately, including any deductions/allowances (typically £13,570 in total), to arrive at your overall figure.
NOTE: Even when UK investors are investing in Apple shares, which is an overseas company, the UK tax rates still apply as long as they are UK tax-domiciled. So if Apple (AAPL) paid out a special dividend of USD $10 (converted to GBP 8.07) and you are paying the basic dividend tax rate of 8.75%, you would pay approx. 70p in tax and receive the rest as income.
Here is a simple process to follow:
1. Add your total dividends and see what tax rates apply, along with deductions. Different tax rates apply to different brackets (personal allowance, basic, higher, and additional).
2. If your only income for the 2023/2024 tax year is a dividend worth £13,570, then you will not have to pay any taxes on it. This is because you have a £1,000 dividend allowance alongside a £12,570 personal allowance.
3. If your dividend for the 2023/2024 tax year is £120,000, you will not pay any tax on the additional rate. Instead, only the personal allowance, basic, and higher tax brackets will apply.
4. The situation gets a little more complex in the standard case, where you have an income and a dividend. You need to calculate income taxes and dividend taxes separately, including any deductions/allowances (typically £13,570 in total), to arrive at your overall figure.
NOTE: Even when UK investors are investing in Apple shares, which is an overseas company, the UK tax rates still apply as long as they are UK tax-domiciled. So if Apple (AAPL) paid out a special dividend of USD $10 (converted to GBP 8.07) and you are paying the basic dividend tax rate of 8.75%, you would pay approx. 70p in tax and receive the rest as income.
Types of dividends for tax purposes UK
In the UK, there are primarily two types of dividends - ordinary and special. The tax treatment of these is generally the same, but it's important to note any specific circumstances or changes in tax regulations.
Ordinary dividends are the regular payouts by companies to their shareholders from their profits or reserves. They are treated as income and are subject to taxation.
Ordinary dividends are the regular payouts by companies to their shareholders from their profits or reserves. They are treated as income and are subject to taxation.
QUOTE
“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.”
To reiterate, individuals in the UK are entitled to a tax-free dividend allowance of £1,000 per year, which will be reduced to £500 next year. Anything received above this allowance is taxed at different rates depending on the individual's income tax band.
Special dividends are one-time or irregular payments made by companies to their shareholders, usually when the company has made significant profits, sold a unit of the business or has surplus reserves.
Special dividends are one-time or irregular payments made by companies to their shareholders, usually when the company has made significant profits, sold a unit of the business or has surplus reserves.
Special Dividends | Regular Dividends |
Non-recurring, mostly one-time payments | Declared on a yearly, quarterly or half-yearly basis |
Not necessary to finalise accounts post-dividends | Mandatory account finalisations needed |
Payment can be made anytime | Payment is at the end of a pre-decided period |
Outlier to dividend policy | Part of divided policy |
Special dividends are also considered income by UK tax authorities and are subject to the same tax rates as the ordinary kind. However, it's important to note that the timing and amount can vary much more, which may affect the tax liability of individuals receiving them.
You might also hear the term ‘qualified dividends” or “unqualified dividends”, both of which have different tax treatments. But these terms apply only to investors who are taxed in the USA, not in the UK.
You might also hear the term ‘qualified dividends” or “unqualified dividends”, both of which have different tax treatments. But these terms apply only to investors who are taxed in the USA, not in the UK.
How are ETF dividends taxed in the UK?
The payout from companies held in an ETF in the UK is typically treated as income and is subject to tax. However, the tax treatment depends on the type of ETF and the investor's individual circumstances. While there are a variety of ETFs, for taxation, they can be divided into two broad classifications:
- Accumulating ETFs - These ETFs reinvest the proceeds of any payouts back into the fund, resulting in potential capital growth. Since the dividends are not distributed to investors, they are not subject to immediate tax. However, investors will usually be liable for capital gains tax when they sell their ETF shares.
- Distributing ETFs - These ETFs distribute payouts to shareholders regularly. The dividends are treated as income and are subject to taxation. They must be reported on the investor's tax return and added to their total taxable income.
The tax rates also depend on the investor's income tax band. Basic rate taxpayers pay tax on dividends at a rate of 8.75%, while higher rate and additional rate taxpayers pay tax at 33.75% and 39.35%, respectively.
Tax-efficient investment accounts, such as Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs), may also provide opportunities for tax advantages when investing in ETFs.
The tax you pay on ETFs and other ETPs (Exchange-traded products) can get a little complicated, depending on the underlying assets. Here’s how it broadly breaks down:
The tax you pay on ETFs and other ETPs (Exchange-traded products) can get a little complicated, depending on the underlying assets. Here’s how it broadly breaks down:
- Equity, commodities, and bond ETFs are all subject to capital gains tax
- Bond ETFs are subject to income tax
- Equity ETFs are subject to dividend tax
- Equity ETFs and REIT ETFs are taxed the same, which would not be the case if you owned the real estate assets directly.
What is HM Revenue and Customs (HMRC)?
HM Revenue and Customs (HMRC) is the tax authority of the United Kingdom. It is responsible for collecting taxes, administering tax regulations, and enforcing tax laws in the UK. HMRC's primary role is to ensure that individuals, businesses, and organisations meet their tax obligations and contribute to the funding of public services.
HMRC plays a crucial role in the UK's tax system by implementing various policies and regulations set by the government. Its responsibilities include collecting income tax, corporation tax, value-added tax (VAT), capital gains tax, inheritance tax, and other taxes.
In addition to tax collection, HMRC provides guidance, advice, and support to taxpayers. It offers online resources, publications, and helplines to assist individuals and businesses in understanding and fulfilling their tax responsibilities. HMRC's website provides comprehensive information on tax-related matters, including forms, deadlines, and tax calculators.
HMRC plays a crucial role in the UK's tax system by implementing various policies and regulations set by the government. Its responsibilities include collecting income tax, corporation tax, value-added tax (VAT), capital gains tax, inheritance tax, and other taxes.
In addition to tax collection, HMRC provides guidance, advice, and support to taxpayers. It offers online resources, publications, and helplines to assist individuals and businesses in understanding and fulfilling their tax responsibilities. HMRC's website provides comprehensive information on tax-related matters, including forms, deadlines, and tax calculators.
Furthermore, HMRC is responsible for tackling tax evasion, fraud, and other forms of non-compliance. It conducts investigations, audits, and enforcement actions to ensure that taxpayers comply with tax laws and do not engage in illegal activities to avoid paying their fair share of taxes. HMRC also collaborates with international tax authorities to combat cross-border tax evasion and promote tax transparency.
As an organisation, HMRC employs a large workforce comprising tax professionals, investigators, auditors, customer service representatives, and IT specialists. Its operations involve using sophisticated digital systems and data analytics to enhance tax administration efficiency and effectiveness.
Overall, HM Revenue and Customs (HMRC) is a vital institution in the UK, playing a critical role in tax collection, enforcement, and support. It ensures that tax revenues are collected fairly and transparently, contributing to the country's functioning and financing of public services.
As an organisation, HMRC employs a large workforce comprising tax professionals, investigators, auditors, customer service representatives, and IT specialists. Its operations involve using sophisticated digital systems and data analytics to enhance tax administration efficiency and effectiveness.
Overall, HM Revenue and Customs (HMRC) is a vital institution in the UK, playing a critical role in tax collection, enforcement, and support. It ensures that tax revenues are collected fairly and transparently, contributing to the country's functioning and financing of public services.
What is entrepreneurs’ relief in the UK, and how does it work?
Entrepreneurs' Relief was a tax relief scheme in the United Kingdom that aimed to encourage entrepreneurship and reward individuals who disposed of their business assets. However, as of April 6, 2020, Entrepreneurs' Relief was renamed Business Asset Disposal Relief (BADR).
Business Asset Disposal Relief allowed eligible individuals to benefit from a reduced Capital Gains Tax (CGT) rate when they sold or disposed of qualifying business assets. Under this relief, the CGT rate was set at 10% instead of the standard rates, which could be as high as 20%. This lower rate applied to the qualifying gains up to a lifetime limit of up to £1 million.
Business Asset Disposal Relief allowed eligible individuals to benefit from a reduced Capital Gains Tax (CGT) rate when they sold or disposed of qualifying business assets. Under this relief, the CGT rate was set at 10% instead of the standard rates, which could be as high as 20%. This lower rate applied to the qualifying gains up to a lifetime limit of up to £1 million.
TIP
BADR, former employees' relief, relates only to Capital Gains Tax on the sale of assets. It does not affect other schemes such as the VAT, Capital Allowance, and Income Tax Relief but operates independently.
To be eligible for Business Asset Disposal Relief, several criteria must be met. The individual had to be a sole trader, a partner in a partnership, or a shareholder in a trading company. They were required to have held the business asset for a minimum qualifying period, typically two years. The asset being disposed of had to be a business asset, such as shares, land, or machinery, used in the business.
It’s worth bearing in mind that the term ’’disposal’ might be a little misleading. The asset could be given away or swapped to qualify under BADR. BADR is open to businesses, including the following:
It’s worth bearing in mind that the term ’’disposal’ might be a little misleading. The asset could be given away or swapped to qualify under BADR. BADR is open to businesses, including the following:
- Sole trader
- Partnership
- Personal company
- Joint ventures
- Trust
It’s not available to the business entity itself, just to those who own shares within the company or those that own the business outright.
BADR - additional information
To claim eligibility under the BADR scheme, some criteria need to be met:
- It must be a trading business.
- It has to have at least two years of trading operations.
- At least 5% of shares must have been held for 2 years.
- Shareholders must have been employees/executives for at least two years prior to the sale.
Individuals can also qualify as sole traders, provided they have been in operations for at least two years. BADR was once valued at £10 million before being reduced to £1 million, causing no small amount of uncertainty to business owners in the process of selling assets and hoping to claim relief.
This reduction is a strict limitation, but other options are available. These alternatives include Investors’ Relief, Seed Enterprise Investment Schemes, and Employee Ownership Trusts.
This reduction is a strict limitation, but other options are available. These alternatives include Investors’ Relief, Seed Enterprise Investment Schemes, and Employee Ownership Trusts.
Alternatives to dividends payouts
For many, reinvesting dividends from large companies is a great way to earn passive income and build wealth year after year. Sadly, the tax-free dividend allowance has been reduced from £5,000 in 2017 to a mere £500 in 2024.
There are other choices for those looking to reduce their tax burdens, though they might not be as lucrative in the long run. Such alternatives include:
There are other choices for those looking to reduce their tax burdens, though they might not be as lucrative in the long run. Such alternatives include:
- Individual Savings Accounts (ISAs) - ISAs are a popular tax-free investment vehicle. They allow individuals to save or invest up to a certain annual limit (which can vary each tax year), and any income or capital gains generated within the ISA are tax-free. There are different types of ISAs available, including Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs.
- Lifetime Individual Savings Accounts (LISAs) - LISAs are explicitly designed for long-term savings towards purchasing a first home or retirement. Contributions made to LISAs receive a government bonus, and both the contributions and the growth are tax-free as long as they are used for qualifying purposes.
- Pension Contributions - Contributions to registered pension schemes benefit from tax relief. Individuals receive tax relief on pension contributions, which means they receive tax advantages on the amount contributed. However, withdrawals from pensions are generally taxable.
- Venture Capital Trusts (VCTs) - VCTs are investment trusts that provide funds to small and high-risk trading companies. Investing in VCTs offers tax advantages, including income tax relief on new subscriptions, tax-free dividends, and capital gains tax exemptions on any profits made from VCT investments.
- Social Investment Tax Relief (SITR) - SITR offers tax relief for individuals who invest in qualifying social enterprises. Investments made under SITR can receive income tax relief and capital gains tax relief.
Recap
The tax-free dividend rates will decrease down to £500 on April 6, 2024. This move is likely to hurt lower-income earners the most, hoping to rely on the extra tax relief via allowances. It could be argued that it arbitrarily penalises smaller investors.
Still, the 8.75% lower dividend remains quite favourable relative to other forms of income, all things considered. And there are still multiple ways to reduce your overall tax burden.
Trading 212 is a zero-commission investing app that allows you to invest from the UK in the knowledge that any dividend earnings can easily be accounted for, making it simple and straightforward to pay any applicable taxes.
Still, the 8.75% lower dividend remains quite favourable relative to other forms of income, all things considered. And there are still multiple ways to reduce your overall tax burden.
Trading 212 is a zero-commission investing app that allows you to invest from the UK in the knowledge that any dividend earnings can easily be accounted for, making it simple and straightforward to pay any applicable taxes.
FAQ
Q: Do you have to pay taxes on dividends in the UK?
Yes, dividends in the UK are subject to tax. Under the current tax rules, individuals are entitled to a tax-free dividend allowance of £1,000 per year. The tax year runs from April to April.
After April 5, 2024, the tax-free allowance will be reduced to £500. Any dividend income received above this allowance is subject to tax. The tax rates depend on the individual's income tax band.
After April 5, 2024, the tax-free allowance will be reduced to £500. Any dividend income received above this allowance is subject to tax. The tax rates depend on the individual's income tax band.
Q: How much tax do I pay on dividends in the UK?
For basic rate taxpayers, the tax rate on dividends is 8.75%, while higher rate and additional rate taxpayers have rates of 33.75% and 39.35%, respectively. However, tax rules can change, so it's always advisable to consult with a tax professional or refer to the latest guidance from HM Revenue and Customs (HMRC). The tax on dividends is different from the personal taxation rate.
Q: What are the UK tax brackets?
The UK tax system has different income tax brackets. The first is the Personal Allowance, where the first £12,570 of income is tax-free. The Basic Rate applies to income between £12,571 and £50,270, taxed at a rate of 20%. The Higher Rate applies to income between £50,271 and £150,000, taxed at a rate of 40%. There is also an Additional Rate for income above £150,000, taxed at a rate of 45%.
Q: How are dividends taxed in the UK for foreigners?
Dividends in the UK are subject to tax for both UK residents and non-residents. However, the tax treatment may vary for foreigners depending on their residency status and any relevant double taxation agreements. Non-residents are generally subject to UK tax on dividends sourced from the UK, while those sourced from abroad may be subject to tax in their home country.
The tax rates on UK dividends for non-residents can vary, and it's important to consider the specific rules and regulations based on the individual's residency status, country of residence, and any applicable tax treaties between the UK and their home country.
The tax rates on UK dividends for non-residents can vary, and it's important to consider the specific rules and regulations based on the individual's residency status, country of residence, and any applicable tax treaties between the UK and their home country.
Q: Do I need to report foreign tax paid on dividends?
Yes, in general, if you have received foreign dividends and paid taxes on them in a foreign country, you may need to report the foreign tax paid when filing your tax return. Many countries, including the UK, have provisions to avoid double taxation on foreign income.
This is often done through tax treaties or foreign tax credit mechanisms. Reporting the foreign tax paid allows you to potentially claim a credit or receive other tax benefits in your home country. The specific reporting requirements and available deductions or credits will depend on the tax laws of your home country.
This is often done through tax treaties or foreign tax credit mechanisms. Reporting the foreign tax paid allows you to potentially claim a credit or receive other tax benefits in your home country. The specific reporting requirements and available deductions or credits will depend on the tax laws of your home country.
Q: Which countries have a double taxation agreement with the UK?
The United Kingdom has entered into double taxation agreements (DTAs) with numerous countries worldwide. These agreements are designed to prevent individuals and businesses from being taxed twice on the same income in both countries.
The specific countries that have DTAs with the UK vary as agreements are negotiated and revised over time. Some countries that have double taxation agreements with the UK include the United States, Germany, France, Australia, Canada, Spain, Italy, India, and many others. It's important to note that the provisions and terms of each DTA can differ.
The specific countries that have DTAs with the UK vary as agreements are negotiated and revised over time. Some countries that have double taxation agreements with the UK include the United States, Germany, France, Australia, Canada, Spain, Italy, India, and many others. It's important to note that the provisions and terms of each DTA can differ.
