Taxation of Dividends

A dividend is a distribution of profits by a company to its shareholders. When a UK company pays a dividend, the amount received is usually paid in full with no tax deducted at source. For example, if a shareholder receives a dividend of £18,000, that is the actual cash received.

Dividends are treated separately in the income tax calculation because they are taxed at different rates from salary, self-employment income, and interest. They are always taxed as the final part of an individual’s income, meaning they are charged after non-savings income and savings income have been taken into account.

For the 2025/26 tax year, dividend income can be taxed at one of four rates:0%, 8.75%, 33.75% or 39.35%. The rate that applies depends on the individual’s total taxable income and which tax bands the dividends fall into.

Dividend Allowance

For 2025/26, individuals are entitled to a dividend allowance of £500. The first £500 of taxable dividend income is taxed at 0%, regardless of whether the individual is a basic, higher or additional rate taxpayer.

It is important to understand that the dividend allowance is not an exemption. Dividend income within the allowance is still included in taxable income and continues to use up the individual’s tax bands. The allowance simply means that no tax is payable on that portion of the dividend income.

Any dividends above the £500 allowance are taxed as follows:

• Dividends falling within the basic rate band are taxed at 8.75%

• Dividends falling within the higher rate band are taxed at 33.75%

• Dividends falling within the additional rate band are taxed at 39.35%

  
  

Interaction with Savings Income

The dividend allowance is available in addition to the personal savings allowance for interest income. However, dividend income can affect how much savings allowance an individual is entitled to.

Where an individual’s total taxable income exceeds the basic rate limit, they are treated as having higher rate income. If total taxable income exceeds the higher rate limit, they are treated as having additional rate income. Dividend income that falls into the higher or additional rate bands is taken into account when determining the level of savings allowance available.

In practice, this means that salary, interest and dividends are all considered together when determining which tax bands apply, even though each type of income is taxed at different rates.

Foreign Dividends

UK-resident and UK-domiciled individuals are taxable on dividends received from overseas companies in the same way as UK dividends.

If a foreign dividend is received after foreign withholding tax has been deducted, the dividend must be grossed up when calculating the taxable amount. The gross figure, before foreign tax, is included in the tax calculation.

For example, if £850 is received after foreign tax of 15% has been deducted, the gross dividend is £1,000. The full £1,000 is included as taxable income, with relief potentially available for the foreign tax suffered.

Stock (Scrip) Dividends

Some companies offer shareholders the option to receive new shares instead of a cash dividend in order to preserve cash. These are commonly referred to as stock or scrip dividends.

Where a shareholder chooses shares instead of cash, they are taxed as if they had received the cash dividend that was available. This notional dividend is treated in the same way as any other dividend and taxed at the appropriate dividend rates.

In some cases, companies offer enhanced stock dividends, where the value of the shares exceeds the cash alternative by a significant margin. Where the difference is substantial (15%), the taxable amount may be based on the market value of the shares received rather than the cash alternative.

Speak to an Expert

The taxation of dividends can quickly become complex, particularly where foreign dividends, stock dividends, or enhanced share alternatives are involved. If you are unsure how your dividend income is taxed or how it interacts with your other income, please feel free to get in touch. Our team would be happy to help.

Authored by: London Team