Scrip Dividend: Meaning, How It Works, Tax Rules, and Examples | Types of Dividend Decision
A scrip dividend is a type of dividend decision which lets a company reward its shareholders with new shares instead of cash. In most schemes, the shareholder gets to pick. They can take the normal cash payment, or they can ask for new shares of roughly equal value instead (LexisNexis UK, n.d.).
The word “scrip” refers to a certificate or entitlement, in this case an entitlement to new shares. A scrip dividend is not the same thing as a bonus issue, also called a capitalisation issue. A bonus issue hands every shareholder free extra shares automatically, with no cash choice offered at all (LexisNexis UK, n.d.).
So the simplest way to remember it: a scrip dividend is a choice, while a bonus issue is not.
How a Scrip Dividend Works
When a company declares a dividend, it may offer a scrip option next to the usual cash payout. The process generally looks like this:
- The board announces a dividend and gives shareholders the option of cash or new shares.
- Shareholders who want shares must register their choice before a set cut off date, usually called the election date.
- The company calculates how many new shares each shareholder gets, based on the cash value owed and the current market price of the stock.
- Anyone who does not actively choose the scrip option is normally paid in cash by default.
Because these are freshly created shares rather than shares bought on the stock market, a scrip dividend generally avoids UK stamp duty, and shareholders also skip the dealing charges they would otherwise pay to buy extra shares themselves (Barclays, n.d.).
Why Companies Offer Scrip Dividends
Companies turn to scrip dividends for a few practical business reasons. The choice to offer a scrip dividend does not happen in isolation. It usually reflects the same broader pressures that shape a company’s dividend policy as a whole, such as liquidity, debt obligations, and growth plans.
Cash stays inside the company. When shareholders pick shares over cash, less money leaves the business, which frees up funds for operations, debt repayment, or expansion (Barclays, n.d.). This links directly back to a company’s liquidity position, one of the core factors affecting dividend policy.
A historic UK tax angle. Some UK companies that carried what was known as structural surplus advance corporation tax found scrip dividends gave them a real tax saving. Other companies mainly gained a cash flow timing benefit rather than a lasting saving. This particular tax advantage has become less common as the underlying tax rules have changed over time (University of Southampton, n.d.).
Convenience for shareholders. Investors who want to build their stake without paying dealing fees or stamp duty may find the scrip route more convenient than manually reinvesting a cash payout (LexisNexis UK, n.d.).
Scrip Dividend Vs Dividend Reinvestment Plan (DRIP)
A scrip dividend and a dividend reinvestment plan, usually shortened to DRIP, can look the same from an investor’s chair, since both end with more shares instead of cash. The mechanics behind them are different.
Scrip dividend: The company issues brand new shares straight to the shareholder in place of a cash payment. New shares like this are generally free of UK stamp duty (LexisNexis UK, n.d.).
DRIP: A separate plan administrator takes the shareholder’s cash dividend and uses it to buy existing shares on the open market. Because these shares are bought on the market rather than newly created, they can attract stamp duty, unlike scrip shares (LexisNexis UK, n.d.).
Scrip Dividend Vs Stock Dividend Vs Stock Split
These three terms get mixed up often, so a side by side comparison helps.
- Scrip dividend: Shareholders choose between cash or new shares for one specific dividend payment.
- Stock dividend or bonus issue: Every shareholder automatically gets extra shares, with no cash choice offered.
- Stock split: The company increases the total number of shares in issue, for example turning one share into two, without changing the overall value of anyone’s holding.
UK Tax Treatment of Scrip Dividends
Tax treatment is one of the things people search for most on this topic, since it is not always obvious. Here is how it works for individual shareholders who are UK tax residents, based on current HMRC guidance.
Taxed like a cash dividend. A shareholder who chooses the scrip option is treated by HMRC as if they had received the equivalent cash dividend, and this income must still be reported as dividend income (Barclays, n.d.; HSBC, 2016).
Dividend allowance. HMRC confirms that every individual gets a dividend allowance of £500 a year, on top of their Personal Allowance. Dividend income within this £500, including scrip dividend income, is taxed at 0 percent (GOV.UK, 2026).
Rates above the allowance. For the tax year running from 6 April 2026 to 5 April 2027, HMRC applies these rates to dividend income above the allowance: 10.75 percent in the basic rate band, 35.75 percent in the higher rate band, and 39.35 percent in the additional rate band (GOV.UK, 2026).
ISA shares stay tax free. Dividends paid on shares held inside an Individual Savings Account are not taxed at all, and this protection also applies to scrip dividend income on ISA held shares (GOV.UK, 2026).
Capital Gains Tax comes later. Selling the new scrip shares in the future can trigger Capital Gains Tax on any rise in value from the date they were issued, separate from the dividend tax already charged when the shares were first received (LexisNexis UK, n.d.).
Non-UK residents. Overseas shareholders can face different rules, and any dividend entitlement that is carried forward without being taken as cash or shares may be taxed under the laws of the country where that person lives (HSBC, 2015).
Because scrip dividends can trigger both income tax now and Capital Gains Tax later, larger shareholders are usually encouraged to get advice from a qualified tax professional before choosing the scrip option (Prudential plc, n.d.).
Enhanced Scrip Dividends
An enhanced scrip dividend is a version where the company deliberately sets the number of new shares so their market value is worth more than the cash dividend being replaced.
Trustees who receive an enhanced scrip dividend on behalf of a trust must decide, under trust law, whether to treat it as income or as capital, and HMRC’s own internal guidance notes it cannot give a single answer that fits every case (GOV.UK HMRC Internal Manuals, n.d.).
Advantages of Scrip Dividends for Investors
- Helps build a bigger shareholding over time without paying extra dealing fees.
- Newly issued scrip shares are generally exempt from UK stamp duty, unlike shares bought on the open market (Barclays, n.d.).
- Can offer a cash flow timing advantage, since no cash physically changes hands until the shares are eventually sold.
Disadvantages and Risks of Scrip Dividends
- No spendable cash arrives, which is a problem for anyone who relies on dividends for regular income.
- The income is still taxable in the same way as a cash dividend, so a tax bill can arrive even though no cash was ever received (Barclays, n.d.).
- Holding more shares in one company raises concentration risk, since a bigger share of the portfolio now depends on a single stock.
- The share price used to value the scrip dividend can move between the announcement date and the actual issue date, so the final value is not fully certain in advance.
Frequently Asked Questions (FAQs)
1. What is a scrip dividend in simple terms?
A scrip dividend is a dividend a company pays out in new shares instead of cash. Shareholders are usually offered the choice between the two.
2. Is a scrip dividend the same as a stock dividend?
Not quite. A scrip dividend usually comes with a choice between cash and shares, while a plain stock dividend or bonus issue is given automatically to every shareholder with no cash option.
3. Do I pay tax on a scrip dividend?
Yes. In the UK, a scrip dividend is treated the same way as a cash dividend for tax purposes and must be reported as dividend income (Barclays, n.d.).
4. What is the UK dividend allowance right now?
HMRC confirms the dividend allowance is £500 a year for the 2026 to 2027 tax year. Dividend income up to this amount is taxed at 0 percent (GOV.UK, 2026).
5. Does a scrip dividend attract stamp duty?
No. Because the shares are newly created rather than bought on the stock market, scrip dividend shares are generally exempt from UK stamp duty (Barclays, n.d.).
6. What is the difference between a scrip dividend and a DRIP?
A scrip dividend involves brand new shares issued directly by the company. A dividend reinvestment plan, or DRIP, uses your cash dividend to buy existing shares on the open market through an administrator, and those market purchases can attract stamp duty (LexisNexis UK, n.d.).
7. Why do companies offer scrip dividends instead of paying cash?
Companies use scrip dividends to keep more cash inside the business for operations, debt repayment, or growth, while still rewarding shareholders in some form (Barclays, n.d.).
8. What is an enhanced scrip dividend?
It is a scrip dividend where the company deliberately sets the share value higher than the cash dividend it replaces. This raises extra questions for trustees, who must decide whether to treat it as income or capital under trust law (GOV.UK HMRC Internal Manuals, n.d.).
9. Can I choose cash instead of a scrip dividend?
In most schemes, yes. A scrip dividend is normally offered as an optional alternative to the standard cash dividend, and shareholders who make no election typically continue receiving cash.
10. Do I need to declare scrip dividends on my tax return?
Yes. UK shareholders who choose the scrip option must still declare that dividend income to HMRC once it goes above their unused Personal Allowance and dividend allowance combined (GOV.UK, 2026).
11. Will I owe Capital Gains Tax on scrip dividend shares?
Not right away. Capital Gains Tax only becomes relevant later, if the shares rise in value and you sell them. This is separate from the dividend tax already charged when the shares were first issued (LexisNexis UK, n.d.).
12. Are scrip dividends still common today?
Fewer UK companies run scrip dividend schemes than in past decades, partly because a specific historic UK tax advantage that some companies relied on has become less common (University of Southampton, n.d.).
References
Barclays. (n.d.). What is a SCRIP dividend? Barclays Smart Investor. https://www.barclays.co.uk/help/smart-investor/dividends/what-is-a-scrip-dividend/
GOV.UK. (2026). Tax on dividends: Check if you have to pay tax on dividends. HM Revenue and Customs. https://www.gov.uk/tax-on-dividends
GOV.UK HMRC Internal Manuals. (n.d.). TSEM3275: Capital items that are income for tax purposes: Trust income: enhanced stock (scrip) dividend. HM Revenue and Customs. https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem3275
HSBC. (2015). Public scrip dividends: Taxation. https://www.hsbc.com/-/files/hsbc/investors/shareholder-information/scrip-dividend/2015/150803-scrip-circular-tax-website.pdf
HSBC. (2016). Public scrip dividends: Taxation. https://www.hsbc.com/-/files/hsbc/investors/shareholder-information/scrip-dividend/2016/scrip-dividend-tax-information-english.pdf
LexisNexis UK. (n.d.). Scrip dividend meaning in UK law. https://www.lexisnexis.com/en-gb/legal/glossary/scrip-dividend
Prudential plc. (n.d.). Tax information, Section A: United Kingdom taxation. https://www.prudentialplc.com/content/dam/prudential-plc/investor/Shareholder-centre/scrip-dividend/scrip-dividend-tax-information.pdf.coredownload.inline.pdf
University of Southampton. (n.d.). The use of scrip dividends by UK companies. Southampton Institutional Repository. https://eprints.soton.ac.uk/36063
Note: Tax figures in this article reflect the official HMRC rates and allowance published on GOV.UK for the 2026/27 tax year at the time of writing. Tax law can change, so confirm current figures directly on GOV.UK or with a qualified tax adviser before making financial decisions.
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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