If you receive dividends, it’s important to understand how they are taxed and whether you need to declare them to HMRC. Dividends aren’t taxed at source like most salaries are, and they’re not part of the PAYE system. That means the responsibility to declare them, if necessary, lies with the person receiving the dividend.
This article deals with how individuals are taxed on the dividends they receive. But, if you are involved in a trust either as a trustee or beneficiary, and the trust receives dividends, these may also be taxable.
It’s worth noting that the situation with trusts is far more complex, so we recommend you use an accountant and ask for help with the tax treatment of any income, including dividends.
What are dividends?
Dividends are how limited companies distribute a share of their after-tax profits to shareholders. If you are a shareholder in a limited company then it’s possible that you will receive dividends, but this isn’t always guaranteed.
Profits from companies are not always distributed to shareholders, especially if it’s been a slow year and there aren’t any profits to distribute. Companies might also decide to retain profits in order to fund future investment, or simply to manage cash-flow.
A company can also choose to pay dividends based on the profit retained from previous years. So keep an eye on those financial reports!
How are dividends paid?
In order to pay dividends, the company must hold a directors’ meeting and declare a dividend. And yes, you’ll need to do this even if you’re the only director and shareholder in the company!
The company must produce a dividend voucher (a bit like a payslip) showing the amount they’ll receive, and issue this to each shareholder. The company must retain a copy of the voucher.
As a side note, if you’re both a director and a shareholder, you might decide to pay yourself a combination of a regular salary, and then take dividends on top of it. This can be more tax efficient than drawing all your remuneration as a salary or bonus, particularly as there is no National Insurance Contribution (NIC) on dividends.
Can I get tax relief or allowances for dividends?
Companies are taxed on their profits through corporation tax, paying 19% (for 2022/23) on their taxable profits. Dividends are paid out of these after-tax profits, so they’ve suffered some tax already which is why the dividend tax rate is lower than it is for regular income tax.
Before we get to that though, it’s worth knowing that there are some tax allowances and exemptions which can apply to tax on dividends:
- The Annual Dividend Allowance: The first £2,000 of dividend income in any tax year is free of tax, and doesn’t need to be declared.
- Personal Allowance: This is the amount of income you can earn before starting to pay tax on it. The allowance for 2021/22 and 2022/23 is £12,570. You can use the personal allowance and the dividend allowance together. Just be aware that your personal allowance reduces by £1 for every £2 you earn above £100,000.
- ISAs: Dividends that you receive from shares in an ISA are exempt from tax, and you won’t normally receive a dividend voucher for them.
So how is dividend tax worked out?
Dividend tax went up for the 2022/23 tax year to cover the new health care levy, with the extra amount being removed from 2023/24 onward (but applied as a separate levy).
The rate of dividend tax that you pay depends on which income bracket you fall into, so you’ll need to know your total income for the year.
To work out how much dividend tax you owe, the first step is to subtract the dividend allowance from your dividend payment. Then add any dividends over the £2,000 dividend allowance to your other income. If the combined amount is under the personal allowance for the year, you will not need to pay any tax on the dividends.
If the combined amount is over the personal allowance, you will need to pay tax on the dividends. The rate you pay will depend on the income tax band your combined income falls into. The tax bands for 2021/22 and 2022/23 are as follows:
2022/23 Dividend Tax Rates and Thresholds
|Thresholds 2022/23||Dividend Tax Rate 2022/23|
|Personal Allowance: no tax paid on income in this band.||£0 – £12,570||0%|
|Basic-rate tax payers||£12,571 – £50,270||8.75% on dividends earned above dividend allowance.|
|Higher-rate taxpayers||£50,271 – £150,000||33.75%|
|Additional-rate taxpayers||£150,001 upwards||39.35%|
This is further complicated by the reduction in the personal allowance for income over £100,000. It’s also important to note that there are different tax bands if you are resident and pay tax in Scotland.
If your dividend income, when added to your other income, straddles two tax bands, then you’ll pay tax on the dividends at different rates. The good news is that moving into the next tax bracket doesn’t mean you’ll pay the higher rate on the whole amount – just on the portion of income in that bracket.
HMRC use a “stacking” calculation which applies different sources of income in order. Dividends are added last, which can be useful as the rate of tax on dividends is less than for “earned” income from salary, self-employment, or savings.
An example of working out dividend tax
In the 2022/23 tax year you have a salary of £35,000, and receive dividends of £3,000:
|Add your total income to the dividend amount:||£35,000 plus £3,000 equals a total income of £38,000|
|Deduct the personal allowance of £12,570 from your total income:||£38,000 minus £12,570 leaves £25,430.
This is in the basic rate tax band, so you’ll pay 20% tax on your wages, and 8.75% of tax on the dividends.
|Deduct the £2,000 dividend allowance from the dividend amount||£3,000 minus £2,000 leaves £1,000. You’ll pay tax on £1,000 at a rate of 8.75%|
How do I pay tax on dividends?
It’s your responsibility to report any taxable income you receive from dividends. If you receive a dividend amount between £2,000 and £10,000 in a tax year, you can report the dividends directly to HMRC and ask for a change in your tax code so that they will take the tax via the PAYE system. Alternatively, you can submit a Self Assessment return.
If you receive more than £10,000 in dividends, you must complete a Self Assessment return.
If it all sounds a bit too stressful, getting help from an accountant might be cheaper than you think. Take a look at our tips for choosing and comparing accountants.