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How Dividends Are Taxed

The way dividends on UK shares are taxed has recently undergone a significant change.

From 6 April 2016, you won’t pay tax on the first £5,000 of dividends you receive in each tax year. Above this £5,000 level you are charged based on what income tax band you fall into. You need to add all your dividends to your other taxable income to see which band applies. Be aware that the government has said that it plans to reduce this dividend allowance from £5,000 to £2,000  from 6 April 2018.

Tax band Tax rate
Basic rate and
non-taxpayers
7.5%
Higher rate 32.5%
Additional rate 38.1%

The ever-useful gov.uk website has a few worked examples of how this new system works.

Dividends for 2015/16

There was no £5,000 dividend allowance for this tax year. You add your dividends to your other taxable income and then pay income tax at the following rates:

Tax band Tax rate
Basic rate and
non-taxpayers
0%
Higher rate 25%
Additional rate 30.56%

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