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. For the 2023/24 tax year, the dividend allowance has been cut from £2,000 to £1,000. It will be further reduced to £500 from April 2024.
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 £12,570 you don’t owe the taxman anything.
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 2023.
|Income tax band*/ 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 2023/24 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 £1,000 of dividends (because of the allowance)
- 8.75% tax on the £2,000 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 £1,000 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.
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