In The Spotlight - UK Dividend Tax Changes

Background

One of the benefits of being a shareholder is the income that may be earned through dividend payments. As per other sources of income this is subject to tax, though not National Insurance. UK taxation for dividend income was reformed in 2016 with the introduction of an annual dividend allowance and tax rates based on income tax bands.

There are some important factors when considering if tax needs to be paid on dividend income:

• Tax-efficient strategies: For example, shareholders do not pay tax on dividends from shares held in an ISA.
• Personal allowances: Shareholders do not pay tax on any dividend income that falls within their personal allowance (the amount of income you can earn each year without paying tax). Additionally, they receive a dividend allowance each tax year (currently £500). You only pay tax on any dividend income above the dividend allowance.
• Income tax band: How much tax shareholders pay on dividends above the annual dividend and personal allowances depends on their income tax band.

UK Dividend Tax Changes

Dividend tax rates

Income tax on dividend income will increase from April 2026 with basic and higher rates of tax rising by 2%. The government estimates this will raise an estimated £280 million of additional tax in the 2026/27 tax year rising to £1,390 million in 2030/31*.

An individual can work out their tax band, by adding their total dividend income to their other income. This may mean that an individual pays dividend tax at more than one rate.

Dividend annual allowance

Individual shareholders can currently earn up to £500 in each tax year before paying any income tax on dividends. This figure is over and above the personal tax-free allowance.

Since its introduction in 2016, the dividend allowance has gradually reduced from £5,000 to its current level of £500 per tax year. The government estimated that the reduction to £500 will raise an estimated £450 million of additional dividend tax in the 2024/25 tax year rising to £940 million in 2027/28**.

Who is likely to be impacted?

The most recent reductions in the annual dividend allowance, impact individuals with taxable dividend income above £1,000 in the tax year 2023/24 and above £500 from tax years from 2024/25.

Analysis conducted by EQ

EQ has carried out analysis across 7.8 million individual shareholder accounts (excluding corporate shareholders) looking at the value of dividends received during the 2024/25 tax year. Of those 88.7% received dividends of £250 or less. The graph below looks at those receiving dividends over £250.

Although some may be close to the threshold, the 397,189 shareholders in the first column received dividends between £250 and £500 and will not be impacted by the reduced dividend allowance of £500.

However, the second column shows that 250,325 shareholders have received dividends between £500.01 and £1,000, above the new annual dividend allowance, and therefore may now need to pay dividend tax for the first time.

This is just a ‘snapshot’ based on EQ data, with the number of shareholders receiving dividends over £500 per tax year likely to be higher when considering dividends received from other sources. Whether shareholders pay dividend tax depends upon their other income for the tax year.

Reporting Dividend Tax

An increase in shareholders paying dividend tax, many for the first time, means that information about how to pay dividend tax is growing in importance. Information is available from HMRC:  Tax on dividends: How to report tax on dividends - GOV.UK

Dividend income up to £10,000 

If an individual completes a Self Assessment tax return, they must report any dividend income on their tax return.

If they do not complete a Self Assessment tax return, they must let HMRC know after the end of the tax year (5 April) and before 5 October.

Individuals do not need to tell HMRC if their dividends are within the dividend allowance for the tax year.

Dividend income over £10,000

Individuals need to fill in a Self Assessment tax return.

If they do not usually send a tax return, they will need to register for Self Assessment by 5 October after the end of the tax year (5 April) in which they received the income.

Impact on employees

Shares obtained through employee share plans

Many employees hold shares obtained through their participation in their company’s employee share plans, so need to be aware of the tax and reporting requirements.

HMRC issued Employment Related Securities Bulletin 56 which provides useful information about dividend income and ways to report it:

Employment Related Securities Bulletin 56 (July 2024) - GOV.UK

Tax advantaged Share Incentive Plan (SIP)

Employees may need to inform HMRC of cash dividends they receive on their SIP shares, along with any other dividends they receive on any other shareholdings they may have.

Employees may be able to use dividends received on their SIP shares to buy additional shares (Dividend Shares). If these are held for the three-year holding period there is no income tax to pay on the dividends used to buy those shares. With £140 million*** invested in SIP Dividend Shares in tax year 2023/24, this is a tax efficient way to receive dividends.

Conclusion

Reviewing how and when you receive dividends, and planning ahead, is more important than ever. With the reduction in the annual dividend allowance, more individual shareholders and employee shareholders will need to consider whether they need to report and pay tax on their dividend income. Knowing how to pay dividend tax, whether through Self Assessment or tax code adjustments, is also key. With detailed information and guidance available, hopefully those impacted for the first time will be able to manage the change effectively.

Useful links

Tax on dividends: Tax on dividends: How dividends are taxed - GOV.UK (www.gov.uk)

SIP shares: https://www.gov.uk/tax-employee-share-schemes/share-incentive-plans-sips

The information contained in this update in relation to tax, is a general summary and is for guidance only and cannot be relied upon. It is based on tax legislation and regulations for UK individuals. If you own a business and are paying yourself dividends, the tax rules may differ. If you are in any doubt about your own tax position, you should seek your own tax advice on the personal tax implications of holding shares. If you have any questions about the impact of dividend tax on your financial position, you should seek independent financial advice.

*Source: Autumn Statement 2022 (assets.publishing.service.gov.uk)

**Source: Budget 2025 - Strong Foundations, Secure Future (assets.publishing.service.gov.uk)

***Source: HMRC Employee Share Scheme statistics - ESS_tables_for_2023-24_fin.ods