Glossary · UK

What is Dividend Reinvestment?

Using cash dividends paid by shares or funds to buy more units automatically, rather than taking the income as cash.

Full Definition

Dividend reinvestment is the practice of using the income paid out by shares, investment trusts or funds to purchase additional units or shares instead of taking it as cash. Many UK platforms offer this through a Dividend Reinvestment Plan (DRIP) or via accumulation fund units, which roll income back in automatically. Reinvesting harnesses compounding, since future dividends are then earned on a larger holding, which can materially boost long-term returns. Tax treatment depends on the account: dividends inside an ISA or pension are entirely tax-free, while those in a general investment account count toward your dividend allowance of GBP 500 for 2026/27, with anything above taxed at 10.75%, 35.75% or 39.35% depending on your tax band. Crucially, reinvested dividends are still taxable income outside a tax wrapper even though you never received cash. Keep records, as reinvested amounts add to the base cost used for capital gains tax.