Glossary · UK
What is Dividend Reinvestment Plan (DRIP)?
A scheme where cash dividends from shares are automatically used to purchase additional shares in the same company at the market price, reinvesting income for compound growth -- though the dividend income remains taxable in the year received.
Full Definition
A Dividend Reinvestment Plan (DRIP) is an arrangement -- offered by either the company itself or the investor's broker -- under which cash dividends declared on shares are automatically used to buy additional shares of the same company rather than being paid out in cash. The purchase typically takes place on or around the dividend payment date at the prevailing market price, though some company-operated DRIPs offer a small discount. DRIPs are a low-cost way to compound returns over time, since transaction fees are usually minimal or nil, and fractional shares can be acquired. However, the tax treatment is identical to receiving the cash dividend: the gross dividend is taxable income in the year it arises. For 2026/27 the Dividend Allowance is GBP 500 per year. Dividends above this are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). If total dividends above the allowance exceed GBP 500 in a tax year, the income must be reported via Self Assessment. The shares acquired through DRIP reinvestment enter the investor's Section 104 pool for CGT purposes at a base cost equal to the value of the dividend reinvested (the amount that was taxed as income), preventing any double taxation on disposal. Holding shares inside a Stocks and Shares ISA removes both the dividend tax charge and any CGT exposure on disposal, making ISA-based DRIPs especially efficient. Investors taking manual dividends and reinvesting them themselves face identical tax treatment -- the DRIP is purely an administrative convenience, not a tax-advantaged structure in its own right.