Understanding the tax implications of dividends can be complex, but it is very necessary for anyone receiving income from shares.
This guide will explain the process and provide clear answers to your questions about UK dividend tax.
What is Dividend Tax?
Dividends are payments made to shareholders by a company from its profits.
The UK government taxes these dividends at different rates depending on your income.
It’s important to note that while dividends are taxed differently than regular income, they are still considered part of your overall income for tax purposes.
How Much Dividend Allowance Do You Have?
Before we get into detail about the tax rates, you must first understand the dividend allowance.
This is a tax-free amount you can receive from dividends each tax year.
For the 2023/24 tax year, the dividend allowance is £2,000.
This means you can earn up to £2,000 in dividends without paying any tax on them.
What Are the Dividend Tax Rates?
Once you’ve exceeded your dividend allowance, you’ll start paying tax on your dividends.
The rate depends on your overall income and falls into three bands:
- Basic rate taxpayers: If your total income (including dividends) is between £12,570 and £50,270, you’ll pay 8.75% tax on dividends above the allowance.
- Higher rate taxpayers: If your total income is between £50,271 and £125,140, you’ll pay 33.75% tax on dividends above the allowance.
- Additional rate taxpayers: If your total income is over £125,140, you’ll pay 39.35% tax on dividends above the allowance.
How is Dividend Tax Calculated?
Calculating dividend tax can be straightforward. First, you subtract your dividend allowance from your total dividend income.
The remaining amount is subject to tax based on your income tax band.
For example, if you earn £3,000 in dividends and your total income is £30,000, you’ll pay 8.75% tax on £1,000 (the amount above the £2,000 allowance).
Do You Pay National Insurance on Dividends?
Unlike other forms of income, dividends are not subject to National Insurance contributions (NICs).
This is one of the advantages of receiving income through dividends.
How Do Dividends Affect Your Personal Allowance?
Dividends are included in your total income for tax purposes.
If your total income, including dividends, exceeds the personal allowance (£12,570 for the 2023/24 tax year), your personal allowance may be reduced or lost entirely.
This is known as the personal allowance reduction.
Can You Offset Dividend Tax Against Other Taxes?
Unfortunately, you cannot offset dividend tax against other taxes.
However, there might be other tax-efficient ways to structure your finances.
I advise that you seek professional advice if you have complex financial circumstances.
How Do I Report Dividend Income to HMRC?
You don’t need to do anything if your dividend income is below the personal allowance and within the dividend allowance.
However, if you exceed these thresholds, you’ll need to report your dividend income on your self-assessment tax return.
What Happens if You Don’t Pay Dividend Tax?
Failing to pay dividend tax can have serious consequences. HMRC can impose penalties and interest on unpaid tax.
In severe cases, you might face criminal prosecution. You must comply with tax regulations to avoid these issues.
How Can I Reduce My Dividend Tax Bill?
While there’s no guaranteed way to eliminate dividend tax, you can potentially reduce your tax bill by:
- Maximising your dividend allowance: Ensure you’re making full use of your dividend allowance.
- Considering tax-efficient investments: Look at other investment options that might offer tax advantages.
- Seeking professional advice: A financial advisor can help you understand your options and make informed decisions.