Dividend reinvestment plans: tax on reinvested dividends

Q: What mistakes come up most often?

Leaving reinvested dividends off the tax return. The dividend is taxable whether or not you receive the cash. Use the dividend confirmations or tax vouchers from the registrar, not your bank statement. Not adding purchases to the pool. Every DRIP purchase increases the base cost. Over a long holding period, the reinvested total can be a large part of the cost. Ignoring incidental costs. Dealing charges and SDRT taken from the dividend are part of the cost of acquisition under TCGA 1992 section 38, and the allowable costs rules apply as normal. Treating DRIP shares as scrip shares. Scrip dividend shares have their own rules. Check whether the company issued shares in place of the dividend or paid cash that was then reinvested. Selling while the plan is still running. A DRIP purchase within 30 days after a sale is matched with that sale, which can change or remove the gain or loss you intended to realise. Poor records. Keep each plan statement showing the date, number of shares, price, charges and SDRT. Registrars may not keep the history indefinitely, and you will need it when you sell. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

A dividend reinvested through a dividend reinvestment plan (DRIP) is still a dividend you received, so it is taxable income in the tax year it is paid even though you never see the cash. Each purchase the plan makes with that money is a separate acquisition of shares for Capital Gains Tax, and the amount spent, including dealing charges and stamp duty, is added to the base cost of your holding.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

What does a DRIP actually do with my dividend?

HMRC describes a DRIP, in its Stamp Taxes on Shares Manual at STSM078030, as an arrangement where shareholders elect on an ongoing basis to reinvest all future cash dividends in buying more shares in the company instead of taking the cash. The cash dividends of everyone in the plan are pooled and used either to subscribe for newly issued shares or to buy existing shares on the market, and the shares are then allocated in proportion to each participant’s entitlement.

The key point is the order of events. The company declares and pays a cash dividend. You have told the plan administrator in advance what to do with it, so it is spent on shares for you on or shortly after the payment date. The election changes where the cash goes, not what you received.

Why is a reinvested dividend still taxable?

Income tax is charged on dividends from UK resident companies under section 383 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Section 384 charges tax on the amount or value of the dividends paid in the tax year, and section 385 makes the person liable the person to whom the dividend is made or who is entitled to it. Under a DRIP you are that person: the dividend is paid to you and applied on your instructions. Choosing to spend it on more shares is no different in principle from asking your bank to move the cash into a broker account and buying the shares yourself.

For the 2026 to 2027 tax year, GOV.UK confirms a dividend allowance of £500, with dividends above that taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. The reinvested amount counts towards your dividend income in exactly the same way as a dividend paid into your bank account. If your dividends exceed your unused Personal Allowance and dividend allowance, you need to report them to HMRC. More on the bands and allowance is in our guide to the dividend allowance and tax rates and how dividends are taxed in general.

Shares held inside an ISA are different. GOV.UK confirms you do not pay tax on dividends from shares in an ISA, so a DRIP running inside an ISA produces neither taxable dividend income nor a gain on the new shares.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

Is a DRIP the same as a scrip dividend?

No, and confusing the two causes errors. Under a scrip dividend (an optional stock dividend), the company itself issues new shares instead of paying the cash dividend. HMRC’s manual at STSM078010 explains that scrip shareholders receive shares equivalent in value to the cash dividend alternative, and separate income tax and CGT rules apply to those shares. Under a DRIP the company pays the cash dividend first and the plan then buys shares with it. Some companies offer both, or have replaced one with the other, so check the circular or the plan terms. Our page on scrip dividends and their CGT base cost covers the scrip rules.

How does each DRIP purchase affect my CGT base cost?

Each reinvestment is a purchase of shares. Under section 38 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), the allowable cost of an asset is the consideration given for its acquisition plus the incidental costs of acquiring it, and those incidental costs expressly include agents’ fees and costs of transfer including stamp duty. So the base cost of the shares bought by the plan is the cash spent on them plus any dealing charge and stamp duty reserve tax taken from your dividend.

Stamp duty reserve tax can arise. HMRC’s guidance at STSM078030 says DRIPs have the same stamp taxes treatment as optional stock dividend schemes, and STSM078010 explains that where existing registered shares are bought on the market, SDRT is chargeable at 0.5%. Where the plan subscribes for new shares instead, there is no transfer of existing securities and that principal charge does not arise.

Shares of the same class in the same company are held together in a single section 104 holding, as HMRC’s helpsheet HS284 explains. Every DRIP purchase is added to that pool, increasing both the number of shares and the pooled cost. When you sell, the cost of the shares sold is the pool cost multiplied by the fraction of the holding sold.

Can the same day and 30 day rules catch DRIP purchases?

Yes. HS284 sets out the order in which shares sold are matched: first with shares acquired on the same day, then with shares acquired in the 30 days after the sale (the bed and breakfasting rule, which applies only if you were UK resident when you acquired them), and only then with the section 104 holding. A DRIP purchase is an acquisition like any other. If you sell part of a holding and the plan buys shares in the same company within the next 30 days, those new shares are matched with part of your sale instead of entering the pool. This commonly happens when someone sells to use a loss or the annual exempt amount without remembering the plan is still active. The share matching rules are explained in more detail separately.

What about accumulation units in funds?

Accumulation units are not a DRIP, but the logic is similar. HS284 explains that with accumulation units you do not receive distributions; the income is retained and reinvested for you as a notional distribution, and no new units are issued. Notional distributions that are subject to Income Tax are allowed as additional expenditure on your accumulation units. So the income is taxed each year and the same amount increases your base cost, even though your unit count does not change. Income units in a fund with a reinvestment option behave more like a DRIP, buying extra units that join your holding.

How does this work in practice?

Illustration only. Priya bought 2,000 shares in a listed UK company for £8,000 several years ago and joined the company’s DRIP. In the 2026 to 2027 tax year two dividends are paid: £400 and £420. Each is applied in full by the plan to buy more shares, with the dealing charge and SDRT coming out of the dividend. Her other income uses her Personal Allowance and she is a basic rate taxpayer.

Item	Amount
Dividend income for the year	£820
Covered by dividend allowance	£500
Taxable at 10.75%	£320, giving tax of £34.40
Section 104 pool cost after both purchases	£8,000 + £400 + £420 = £8,820

If Priya later sells the whole holding for £11,000 and no same day or 30 day matching applies, her gain is £11,000 less £8,820, which is £2,180. Had she forgotten the DRIP purchases, she would have reported a gain of £3,000, paying tax twice on the £820 she was already taxed on as income. For gains above the annual exempt amount, see our guide to Capital Gains Tax rates; GOV.UK confirms the annual exempt amount for 2026 to 2027 is £3,000.

What mistakes come up most often?

Leaving reinvested dividends off the tax return. The dividend is taxable whether or not you receive the cash. Use the dividend confirmations or tax vouchers from the registrar, not your bank statement.
Not adding purchases to the pool. Every DRIP purchase increases the base cost. Over a long holding period, the reinvested total can be a large part of the cost.
Ignoring incidental costs. Dealing charges and SDRT taken from the dividend are part of the cost of acquisition under TCGA 1992 section 38, and the allowable costs rules apply as normal.
Treating DRIP shares as scrip shares. Scrip dividend shares have their own rules. Check whether the company issued shares in place of the dividend or paid cash that was then reinvested.
Selling while the plan is still running. A DRIP purchase within 30 days after a sale is matched with that sale, which can change or remove the gain or loss you intended to realise.
Poor records. Keep each plan statement showing the date, number of shares, price, charges and SDRT. Registrars may not keep the history indefinitely, and you will need it when you sell.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.