How Dividends Tax Work

Published on October 28, 2023

DividendsPersonal AllowanceIncome Tax

Dividends Tax If you own shares in a company, you might receive dividend payments. Dividends are a share of a company's profits distributed to its shareholders. In the UK, it's important to know how these dividends are taxed. This guide provides a detailed overview of dividend taxation, including exemptions, allowances, and tax rates.

Dividend Income and Personal Allowance

  • You can receive dividend income each year without paying tax.
  • This income falls within your Personal Allowance, which is the amount you can earn annually without incurring tax.
  • Any dividend income within your Personal Allowance is not subject to taxation.

Dividend Allowance

  • In addition to the Personal Allowance, you have a dividend allowance.
  • You are only required to pay tax on dividend income that exceeds this allowance.
  • Dividends earned from shares in an Individual Savings Account (ISA) are entirely tax-free.

Dividend Allowance Amounts

Tax YearDividend Allowance
6 April 2023 to 5 April 2024£1,000
6 April 2022 to 5 April 2023£2,000
6 April 2021 to 5 April 2022£2,000
6 April 2020 to 5 April 2021£2,000
6 April 2019 to 5 April 2020£2,000
6 April 2018 to 5 April 2019£2,000
6 April 2017 to 5 April 2018£5,000
6 April 2016 to 5 April 2017£5,000

Note that the rules differ for dividends received before 6 April 2016.

Tax Rates on Dividends

  • The amount of tax you pay on dividends above the dividend allowance depends on your Income Tax band.
  • Here are the tax rates for different Income Tax bands:
Tax BandTax Rate on Dividends over the Allowance
Basic rate8.75%
Higher rate33.75%
Additional rate39.35%
  • Your total dividend income is added to your other sources of income to determine your applicable tax band.
  • It's possible to pay tax at multiple rates based on your income.

To calculate your Income tax, you can use the following tool Take Home Pay Calculator .

To compare differences between two salaries, you can use the following tool Compare two salaries .

To calculate your marginal rate tax , you can use the following tool Marginal tax rates.

Tax Calculation Example

  • Let's consider an example for better understanding:
    • You receive £3,000 in dividends and earn £29,570 in wages during the 2022 to 2023 tax year.
    • Your total income is £32,570.
    • With a Personal Allowance of £12,570, your taxable income is £20,000.
    • Since this falls into the basic rate tax band, you would pay:
      • 20% tax on £17,000 of wages
      • No tax on £2,000 of dividends due to the dividend allowance
      • 8.75% tax on the remaining £1,000 of dividends

Paying Tax on Dividends

  • If you need to pay tax on up to £10,000 in dividends, you can inform HMRC by:

    1. Contacting their helpline.
    2. Requesting HMRC to adjust your tax code (tax will be deducted from your wages or pension).
    3. Including it in your Self Assessment tax return (if you already fill one out).
  • You don't have to inform HMRC if your dividends remain within the dividend allowance for the tax year.

Paying Tax on Over £10,000 in Dividends

  • If your dividend income exceeds £10,000, you must complete a Self Assessment tax return.
  • If you don't typically submit a tax return, you need to register by the 5th of October following the tax year in which you received the income.

Understanding how dividends are taxed is crucial for individuals who receive dividend income in the UK, as it ensures compliance with tax regulations and helps you manage your finances effectively.

Sources

Tax on dividends: How dividends are taxed - GOV.UK

What are the dividend tax rates in the UK?

UK Dividend Tax Explained: Step-By-Step Guide

UK dividend tax rates and thresholds for 2023/24

https://www.wellersaccountants.co.uk/blog/uk-dividends-the-dividend-tax-rates-everything-you-need-to-know

Dividend tax explained