You may be wondering how much tax you pay on dividends. The amount of tax that you pay on dividends depends on how much money you earn from them, which tax bracket you fall into, and tax rates for the current financial year.
For example, in all cases, the first £2,000 of dividend income is tax-free and if you’re a basic rate taxpayer, in the current tax year 2022/23, you’ll pay 8.75% tax on dividends. If you’re a higher rate income tax payer, you’ll pay 33.75% tax on dividends, and if you’re an additional rate taxpayer, you’ll pay 39.35% tax on dividends. Capital Gains Tax may also apply to dividends in some cases. For personalised information on how your dividends tax is calculated, you should speak to an accountant or financial advisor.
In this post, we’ll break down the tax rates for dividends based on your overall earnings, and explain more about dividends and how they work before sharing some tips on how to reduce your tax liability.
What Is A Dividend?
A dividend is a cash payment made by a company to its shareholders and to receive dividends, you must first buy shares. Company profits are first used to cover operational costs and then any remaining profits are either reinvested back into the business or paid out to shareholders as dividends.
In the UK, there are two types of dividends: ordinary and special. Ordinary dividends are paid out of a company’s profits, while special dividends are paid out of surplus cash that isn’t needed for everyday operations. Cash dividends can be either interim (paid half-yearly) or final (paid once a year at the end of the financial year). Dividends may also be paid in shares rather than cash.
How Is Tax On Dividends Worked Out?
In the UK, taxes on dividends are calculated using a marginal rate system. This means that the tax you pay on your dividends depends on your overall income tax bracket. For example, if you are in the basic 20% income tax band, you will currently pay 8.75% tax on your dividends and if you are in the higher 40% income tax bracket for earning, then you will pay 33.75% tax on your dividends. Finally, if you are in the additional rate income tax band, the dividend tax rate is 39.35%.
Just like your personal tax-free allowance for income tax, dividends are also subject to a dividend tax allowance, which is currently set at £2,000 per year. This means that you can earn up to £2,000 in dividends without having to pay any tax on them but then any dividends you earn above this amount will be subject to taxation at your marginal rate.
Income rate Tax Band (for England, Wales & Northern Ireland)
Tax rate paid on dividends over personal allowance of £2,000 for 2022/23
Basic (earnings between £12,571 – £50,270)
Higher (earnings between £50,270 to £150,000)
Additional (earnings over £150,000)
To work out your dividend tax band, you need to add your total dividend income to your additional income. You may pay tax at more than one rate and you will receive notification of your tax band from HMRC.
Example Of Divided Tax Calculations
If you get £3,000 in dividends and earn £29,570 in wages in the 2022 to 2023 tax year.
This gives you a total income of £32,570.
You have a Personal Allowance of £12,570. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
20% tax on £17,000 of wages
no tax on £2,000 of dividends, because of the dividend allowance
8.75% tax on £1,000 of dividends
What Were The Old Rules?
There were different tax rates for dividend payments before 6th April 2016. Any dividends you earned were deemed to have been taxed at 10% before they were paid to you. If you think that you owe tax from this far back, you should consult the guidance available on HMRC’s website and consult your accountant or financial advisor for assistance in settling your outstanding tax bill.
When Do I Pay Capital Gains On Dividends?
Capital gains occur when you sell an asset for more than you paid for it. For example, if you bought a share in a company for £50 and then sold it for £60, your capital gain would be £10. This means that when you decide to sell your shares in a company, you may be subject to capital gains tax (CGT). This tax is levied on the profits you make from the sale, and the amount you pay depends on your tax bracket.
For example, in 2022-23, basic-rate taxpayers will pay 10% CGT on profits above £12,300, while higher-rate taxpayers will pay 20% CGT. You will also get an annual tax-free allowance for capital gains, so if your profits fall below this amount, you won’t have to pay any tax at all. 2022/23 tax year capital gains tax-free allowance is £12,300 for individuals and £6,150 for trusts.
Ultimately, capital gains tax is something to be aware of if you’re planning on selling your shares, but as long as you stay within your annual allowance, you shouldn’t have anything to worry about.
The main difference between dividend tax and capital gains tax is that capital gains are taxed on the profit made from the sale of an asset, while dividends are taxed on the income received from owning shares in a company. Both taxes are payable on earnings above a certain threshold which we’ve outlined above.
Ways To Reduce Dividend Tax Liability
As a shareholder in a company, you may be liable to pay tax on any dividends you receive but there are things you can do to reduce your dividend tax liability. One way is to hold shares in a tax-privileged account, such as an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP).
Another way to reduce your dividend tax liability is to invest in shares that are eligible for the Dividend Tax Credit. This credit is available on dividends from UK companies and can reduce your tax bill by up to 10%. Finally, you can also claim the Tax-Free Dividend Allowance, which allows you to receive up to £2,000 in dividends tax-free. By taking advantage of these allowances and credits, you can minimize your dividend tax liability and keep more of your hard-earned cash.
Ultimately, the best way to reduce your dividend tax liability is to talk to a qualified accountant or financial advisor. They will be able to help you understand the rules and regulations surrounding dividend taxes and provide you with guidance on how to minimize your liability.
How To Pay Tax Owed On Dividends
If you have earned up to £10,000 of dividends in any given tax year, you can let HMRC know by
putting it in your Self Assessment tax return, if you already fill one in
If you have earned over £10,000 of dividends in any given tax year, you will need to let HMRC know by declaring the income when you fill in a self-assessment tax return. If you haven’t previously sent a tax return, you need to register by 5th October in the year following the tax year that you received the dividend income.
Tax Payment Deadlines
There are a few different deadlines to be aware of when paying your taxes in the UK. The tax year runs from 6 April to the following 5 April and for individuals that need to fill out a self-assessment tax return, this must be filed by January 31st of the year following the tax year that you’re declaring your income for. Selt assessment is the online tax return that covers income from employment, pensions, and other sources including dividends. Payments for
31st January (current tax year) – The first payment on account for the tax year ending the following 5 April is due.
31st July (following the end of the tax year) – The second payment on account for the tax year ending the previous 5 April is due.
31st July (following the end of the tax year) – Your balancing payment if owed is due at this time.
How Are Dividends Paid To Shareholders?
When they are paid in cash, shareholders receive their dividends via a cheque or direct credit to their bank account. If they are paid in shares, shareholders receive new shares in the company.
Dividends are usually paid twice a year, but some companies pay them quarterly or even monthly. Most companies will announce their dividend payments in advance so that shareholders can plan accordingly.
There is no guarantee that a company will continue to pay dividends, and the number of dividend payments can fluctuate from year to year. Regardless of regularity, over time, dividends can provide a significant source of income for shareholders.
What Is An Ordinary Dividend
An ordinary dividend is a cash distribution from a corporation to its shareholders. The amount of the dividend is determined by the board of directors and is usually paid out quarterly. Most corporations pay dividends out of their earnings, but they can also choose to issue dividends from their cash reserves.
Dividends are typically paid in proportion to the number of shares that a shareholder owns. For example, if a shareholder owns 100 shares of stock and the company declares a $1 per share dividend, the shareholder would receive $100. While dividends are not guaranteed, they are typically declared regularly. Some companies even increase their dividend payments each year, which can provide shareholders with a valuable source of income.
What Is A Special Dividend?
A special dividend is a dividend that is declared outside of the normal timetable for dividends by a company’s board of directors. Special dividends are not part of the company’s regular dividend payments and are usually paid out of the company’s earnings or reserves. In the United Kingdom, special dividends are subject to income tax at the recipient’s marginal tax rate.
The decision to declare a special dividend is typically made when a company has strong profits and cash flow and the board of directors believes that the company can afford to return some of its excess cash to shareholders. Special dividends can also be used as a way to return money to shareholders when a company is experiencing financial difficulties and cannot afford to pay a regular dividend.
Special dividends can be a good way for investors to boost their income, but they should be aware that they are subject to income tax. In addition, special dividends are typically not paid regularly, so investors should not count on them as a source of predictable income.
What Are The Advantages Of Investing In Dividend-Paying Stocks?
There are several advantages to investing in dividend-paying stocks. First, dividend payments can provide investors with a regular source of income, even if the stock price remains stagnant. This can be especially helpful for investors who are retired or otherwise relying on their investment portfolio for income.
In addition, dividend payments can provide investors with a way to measure a company’s profitability. Companies that consistently pay dividends are typically profitable and have strong cash flow. This can be a good indicator of a company’s financial health.
Finally, dividend-paying stocks tend to be less volatile than non-dividend-paying stocks. This means that they are less likely to experience sharp declines in price during periods of market turmoil. For this reason, dividend-paying stocks can be a good addition to any portfolio.
What Are The Risks Of Investing In Dividend-Paying Stocks?
There are a few risks to be aware of when investing in dividend-paying stocks. First, dividend payments can be reduced or eliminated if a company’s financial condition deteriorates. This means that investors could see their income stream dry up if the company is no longer profitable.
In addition, dividend payments are not guaranteed. While most companies that pay dividends do so regularly, there is no guarantee that a company will continue to pay dividends in the future. This means that investors could see their income stream cut off if the company decides to stop paying dividends.
Finally, dividend-paying stocks tend to be more expensive than non-dividend-paying stocks. This means that investors may need to pay more for a company’s stock if they want to receive dividend payments.
Despite these risks, dividend-paying stocks can be a good addition to any investment portfolio. For investors who are looking for income, dividend-paying stocks can provide a regular source of payment. In addition, dividend-paying stocks tend to be less volatile than non-dividend-paying stocks, which can help to reduce risk in a portfolio.
You should now have a good understanding of what dividends are, how they work, and how much tax you will need to pay based on your combined earnings and dividend income that you receive each tax year.
To recap, dividends are a type of investment income that is paid out by a company to its shareholders. When a company makes a profit, it can choose to distribute some of that profit to its shareholders in the form of dividends therefore if you hold shares in a company, you may receive dividend payments from the company as an additional source of income.
It’s important to be aware that there is the tax payable on dividends and you must pay this within the deadlines set by HMRC each financial year. The amount of tax you pay will depend on how much dividend income you receive, which tax bracket you fall into, and the dividend tax rates for the financial year that you received dividend payments.
For more information on paying tax on dividends in the UK, speak to an accountant or financial advisor. They can help you calculate your taxable income and marginal tax rate, and claim any reliefs or allowances that you may be entitled to.