Scrip Dividends: How Shares Instead of Cash Are Taxed in the UK
When a company offers shares instead of a cash dividend, HMRC still taxes it as dividend income based on the cash value forgone — plus it sets your CGT cost basis for the new shares. Here's how scrip dividends actually work for tax purposes.
What a Scrip Dividend Is
A scrip dividend (also called a stock dividend) gives shareholders the option to receive new shares in the company instead of a cash dividend payment, typically calculated to have broadly the same value as the cash alternative at the time of the offer. Companies sometimes offer this to conserve cash while still rewarding shareholders, and shareholders sometimes prefer it to avoid dealing costs of manually reinvesting a cash dividend, or simply to increase their shareholding without needing to find additional cash.
Crucially, from a tax perspective, choosing shares over cash doesn't change the fundamental character of what you've received — it's still a dividend, taxed as dividend income.
How the Taxable Amount Is Calculated
| Element | How it's typically determined |
|---|---|
| Taxable dividend income amount | Generally the cash value of the dividend you would have received had you chosen cash, as set out in the specific scrip dividend scheme's terms |
| Alternative basis (less common) | In some scheme structures, the market value of the shares actually issued is used instead, if this differs from the cash alternative |
| Reference date | Company scrip dividend announcements specify the calculation date and method — check the specific company's documentation |
This means the number of shares you receive isn't itself the direct basis for the tax calculation — it's the underlying value of the dividend entitlement that matters, with the share allocation simply being how that value was delivered to you.
The Dividend Allowance Applies as Normal
| 2026/27 dividend tax figures | Amount/rate |
|---|---|
| Dividend allowance | £500 |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Scrip dividend income is added together with any cash dividend income you receive across the tax year, and the combined total is what's tested against the £500 dividend allowance — there is no separate, additional allowance specifically for scrip dividends, and no tax advantage in choosing shares purely to try to access more tax-free dividend income.
Setting the Capital Gains Tax Base Cost
This is the part of scrip dividend taxation most likely to be overlooked, and getting it wrong risks double taxation. When you eventually sell shares that were originally received via a scrip dividend, the cost basis used to calculate any capital gain is the amount that was taxed as dividend income at the time the shares were issued — not zero, and not the shares' value at some other date.
Worked example
| Step | Detail |
|---|---|
| Scrip dividend received | Shares with a cash-equivalent value of £600, taxed as dividend income in that tax year |
| CGT base cost of these specific shares | £600 (the amount already taxed as dividend income) |
| Shares later sold for | £950 |
| Taxable capital gain on sale | £950 − £600 = £350 |
If an investor mistakenly used a £0 cost basis (perhaps assuming the shares were "free" since no cash was paid to acquire them), they would overstate their capital gain by the full £600 already taxed as dividend income — effectively paying tax twice on the same underlying value. Keeping clear records of the taxable dividend value at the time scrip shares are issued is essential to avoid this error.
Scrip Dividends Within an ISA or SIPP
Held within a Stocks and Shares ISA or a SIPP, scrip dividends avoid both the dividend income tax and the later CGT base cost complexity described above, since all income and gains within these wrappers are tax-free (ISA) or tax-deferred (SIPP). For investors who hold dividend-paying shares primarily within tax-advantaged wrappers, the scrip dividend tax mechanics described in this guide become largely academic — they only matter for shares held in a general investment account outside a wrapper.
Are Scrip Dividends Still Common?
Scrip dividend schemes were more widely offered by UK-listed companies in past years, particularly as a cash-conservation tool during periods of financial pressure, but many companies have moved toward straightforward cash dividends, sometimes paired with a separate, distinct dividend reinvestment plan (DRIP) facility offered through investment platforms rather than directly by the company itself. It's worth noting that a company-run scrip dividend and a platform-run DRIP, while superficially similar in outcome (more shares instead of cash), can have subtly different mechanics and should each be checked against their own specific terms — shareholders interested in either option should check the specific company's current dividend announcements and their investment platform's own facilities, since availability varies considerably between companies and over time.
Frequently asked questions
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