Answers · UK 2025/26

How are dividend reinvestment plan (DRIP) shares taxed in the UK?

Shares received through a dividend reinvestment plan are taxed exactly the same as a cash dividend -- the value of the new shares on the reinvestment date counts as dividend income in the year it's received, using your £500 Dividend Allowance and dividend tax rates, even though you never actually received cash. That reinvested amount then becomes the acquisition cost of the new shares for future Capital Gains Tax purposes.

Last updated: 2 July 2026Last reviewed: 2 July 2026How we verify

Full answer

A dividend reinvestment plan (DRIP) lets shareholders automatically use their cash dividends to buy additional shares in the same company, rather than receiving the dividend as cash -- but from a tax perspective, HMRC treats this exactly as though you'd received the cash dividend and then chosen to reinvest it yourself. **Dividend income tax applies regardless of reinvestment** Even though no cash actually reaches your bank account, the value of the shares you receive through the DRIP on the dividend payment date counts as dividend income for that tax year, in exactly the same way a cash dividend would. This means it uses up your £500 Dividend Allowance (2026/27) and, once that's exceeded, is taxed at the dividend rates: 10.75% for basic rate taxpayers, 35.75% for higher rate, and 39.35% for additional rate taxpayers (on top of any tax due on other income). **Why this catches people out** A common misconception is that because the dividend was "reinvested" rather than paid out as cash, no tax is due until the shares are eventually sold -- this is incorrect for shares held directly or in a general investment account. The dividend tax liability arises in the year the DRIP shares are allocated, regardless of whether you ever see the cash, meaning you may need to find money from other sources to pay the tax due. **The reinvested shares become a new "pooled" acquisition for CGT** The value of shares received through a DRIP becomes their acquisition cost for Capital Gains Tax purposes when you eventually sell them, added into your Section 104 pool for that holding alongside shares bought through other means -- this means each DRIP reinvestment effectively creates a new "purchase" for CGT cost basis tracking, adding administrative complexity if you sell shares later and need to calculate your gain. **DRIPs inside an ISA or SIPP -- no tax at all** If the shares generating the dividend are held inside a Stocks & Shares ISA or a SIPP, dividend reinvestment (whether automatic or via a DRIP) is entirely free of both dividend tax and Capital Gains Tax -- this is one of the strongest arguments for holding dividend-reinvesting shares or funds inside a tax wrapper rather than in a general investment account, since compounding growth happens completely tax-free. **Scrip dividends compared** A DRIP (where the company or broker facilitates buying additional shares on the market or through a dividend reinvestment scheme) should be distinguished from a "scrip dividend" (where the company itself offers new shares directly, instead of cash, as an alternative form of the dividend) -- both are generally taxed as dividend income at their cash-equivalent value, though the exact mechanics and paperwork differ. **Practical tip** If you hold dividend-paying shares outside an ISA or SIPP and use a DRIP, keep clear records of the value and date of each reinvestment, since you'll need this both to report dividend income correctly on a Self Assessment return (if required) and to calculate your CGT cost basis accurately when the shares are eventually sold.