What are the ISA dividend tax benefits?
Any dividends you earn in an ISA account are free from UK tax and do not count towards your personal dividend allowance.
Personal dividend allowance
Each tax year, everyone has a £500 tax-free dividend allowance. This used to be £1,000 last tax year. Any dividends which are over this allowance are subject to tax. The rate of tax which you are charged depends on your income tax band: 8.75% for basic rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional rate taxpayers.
Dividend income earned in a Stocks and Shares ISA is free from UK tax and does not count towards this allowance. This means you will save tax if your ISA dividends are over £500.
For example, if a higher-rate taxpayer earned £3,000 in dividend income in a year in a general investment account, they would have to pay tax on £2,500 of that income.
Their dividend tax rate would be 33.75%, meaning a tax bill of £843.75.
If they earned that £3,000 dividend income in an ISA, they would not pay any UK tax on it.
Reinvested dividends
In most Stocks and Shares ISAs, you can choose to reinvest your dividends. This is where you use your dividend income from an investment to buy more shares. This can give a boost to the gains that you make on your investment over time.
Do reinvested dividends count as ISA contributions?
Reinvested dividends do not count as ISA contributions.
Any income or interest you earn within your ISA account is tax-free and does not count towards your annual allowance.
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Learn how to make the most of your Stocks and Shares ISA with our useful guides.