Income from dividends can be an amazing wealth-building tool. In large part, because they can allow your investment portfolio to blossom and grow through the power of compound interest. And, holding your income-producing investments in a stocks and shares individual savings account (ISA) is a fantastic way to protect your growth from tax on the dividends.
We’re going to cover everything worth knowing about the relationship between a stocks and shares ISAs, dividends and tax. We’ll explain all the tax benefits and rules to help you to keep more of your gains.
Dividends are payments made to shareholders as a reward for being an investor. Dividend payouts can vary in size and frequency. They’re not guaranteed and sometimes depend on the performance of the underlying company or investment. Usually, dividends paid to investors are based on a portion of earnings or profit from a stock or fund.
Here are some examples of popular types of investments that sometimes reward investors with a regular dividend income payment:
It’s not the stocks and shares ISA itself that pays dividends, but the investments you hold within the account. So, not everyone will receive ISA dividend payments. Only those of you who are investing and holding income-generating assets within this account type will receive ISA dividends.
If you want to start using a stocks and shares ISA to invest in dividend-paying stocks, here’s a step-by-step guide to help you get started:
It depends on the investments. For the majority of investments bought in the UK, there’s no dividend tax on ISA shares. As long as the assets are held in your stocks and shares ISA account.
Often, your brokerage platform will make it clear which investments are “ISA-ready” and can stay inside the wrapper, protected from the taxman. So, stocks and shares ISA tax on dividends is zero for most investments. However, it can be a different situation for certain international investments, for example – US stocks.
This is why many will refer to ISAs as being “tax-efficient” rather than “tax-free”. It’s a small difference but an important one. Saying that a stocks and shares ISAs means paying absolutely no tax isn’t completely true for some investors.
With some brokerages, you can buy US-based stocks and hold them in your stocks and shares ISA. But, you’ll need to complete a W-8BEN form. It’s nothing complex, just some basic paperwork stating you’re a UK tax resident.
Then, when you invest in US stocks, the tax on dividends in an ISA will be charged as withholding tax (WHT) of 15% on any income.
How dividend reinvestment works for your stocks and shares ISA will depend on the platform you’re using. And, the investments you’re holding. Some types of investments will automatically reinvest dividends back into the fund, they will usually have “accumulation” or “Acc.” in the title.
For individual stocks and other types of investments that have “distribution” or “Dist.” in the title, dividend payments will be paid out as cash directly into your account. With certain platforms, you can choose to automatically reinvest any dividends from stocks. But, it’s always worth checking under the hood of any potential investments and platforms to find out what happens to dividends.
Nope, this isn’t necessary. A major benefit of using a stocks and shares ISA is that tedious little bits of paperwork and admin like this are all taken care of. There’s no need to declare ISA dividends. So, this is one less thing for you to worry about.
No, they don’t. Any dividends generated from investments held in your stocks and shares ISA will automatically stay within the ISA but won’t count as an additional contribution. The great news about this is that it means that dividend income will not count towards your current £20,000 yearly ISA allowance.
This applies whether you choose an investment that automatically reinvests dividends back into the fund (like an accumulation ETF) or if the dividends are distributed into your account as cash and you decide to reinvest them manually.
The key point is that you need to make sure these income-generating investments are held within your stocks and shares ISA account if you want to make the most of the tax benefits.
Dividend rewards from your investments can be brilliant for building long-term wealth. One of the best ways you can maximise the effects of compounding returns with your dividends is by making the most of your stocks and shares ISA allowance.
For any investments held in your stocks and shares ISA that pay dividends, you’ll automatically reduce your tax burden. For most stocks held within your ISA, you’ll have absolutely no tax to pay on the income being generated. At the end of the day, all of this means you keep more of your money.
But, it’s always worth making sure you’re using a brokerage platform that gives you access to a wide choice of ISA-compatible dividend shares with no tax. And, take a second to double-check whether income is automatically reinvested or if you have to do it yourself.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
How compound interest can make your stocks and shares investments grow faster than they would do otherwise.
We explain what you need to know about managed stocks and shares ISAs, from the different types to how they compare against DIY ISAs.
Should you hold your investments in an ISA, a general account, or both? Here’s the lowdown on your options.
Find out the best performing stocks and shares ISA funds year-to-date, annually and over the last 5 years.
If you’re thinking of opening a stocks and shares ISA, make sure you understand the risk and how to manage it.
Stocks and shares ISAs can help you maximise investment returns – but they come with strings attached. We explain one of the key restrictions.
Use it or lose it: We explain why the stocks and shares ISA deadline matters if you want to maximise your tax-free investment allowances.
Looking to invest in an ISA and not sure of the difference? Read our guide as we look at the pros and cons of each and how to invest.
We look at how many people are paying tax, where the UK’s tax revenue comes from and what the money is spent on.