Dividends Tax Explained

HMRC requires you to pay tax on all types of income, including from dividend payments. But your allowance is in play, and there are varying rates.

Daniel Liberto Last updated on 11 April 2022.
Dividends Tax Explained

What is dividend tax?

Once you pull in a certain amount of money, the government will want its cut. That applies not only to salaries but also to other income, including investment gains.

When you sell at a profit or shares you own reward you with a portion of company earnings in the form of a dividend, HMRC will normally expect you to declare and pay tax on it.

» MORE: About paying tax

How are dividends taxed?

Every year, the government grants investors a tax-free dividend allowance. At present, income payments from investments under £2,000 aren’t taxed, and that’s been the case since 2018 when the exemption was cut from £5,000.

Dividends can count towards your personal allowance, too, provided it hasn’t already been exhausted by other income streams, such as salary or pension. Anyone making under £100,000 can currently earn up to £12,570 each fiscal year without paying tax, so if the only income you receive from April to April is dividends and they total less than £14,570 you don’t owe the taxman anything.

» MORE: About the personal savings allowance

How much are dividends taxed?

Dividend tax rates are based on your overall earnings. The table below shows how much dividends tax you’ll have to pay from April 2022.

Income tax band*/ Dividend Tax rate
  • Basic rate (income between £12,571 and £50,270) - 8.75% dividend tax rate
  • Higher rate (income between £50,271 and £150,000) - 33.75% dividend tax rate
  • Additional rate (income above £150,000) - 39.35% dividend tax rate

Source: UK Government *Income tax bands differ slightly for people living in Scotland

To work out your tax band, add dividend takings to all other sources of taxable income. For example, if you earn £29,570 in wages and £3,000 in dividends in the 2022/23 tax year your total income would be £32,570.

Your personal allowance of £12,570 would be deducted from this leaving £20,000 that is subject to tax.

This income sits in the basic tax band which means that you’d pay:

  • 20% tax on £17,000 of wages
  • 0% tax on £2,000 of dividends (because of the allowance)
  • 8.75% tax on the £1,000 worth of dividends over the allowance

Dividends enter the equation only after tallying up income from work, pensions, property, and then interest on savings accounts. As illustrated, coming last is generally a good thing because these payments are subject to lower taxation.

» MORE: About income tax

How do I pay tax on dividends?

If you pocket more than £2,000 in dividends, you’ll need to let HMRC know. For returns of £10,000 or less, you can ask the tax authority to adjust your tax code so that the money is taken directly from your wages or pension.

That option disappears when annual dividend income exceeds £10,000. In such cases, the only available path is to file a separate self-assessment tax return.

How to avoid tax on dividends

Luckily, there just so happens to be a legal way to significantly reduce or completely wriggle out of paying dividend tax: investing through a stocks and shares ISA. All UK residents over 18 can deposit up to £20,000 each year into these accounts, with any funds held within them shielded from dividend and capital gains tax obligations.

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you

Image source: Getty Images

About the author:

Daniel is a freelance finance journalist. He has written and edited news, deeper analysis features, and opinion pieces for the Financial Times, Investopedia and the Investors Chronicle. Read more

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