Tax Advice

Dividend Tax: What Do You Need To Know?

26 November 2018

It’s a great feeling reaping the rewards of your investments. You’ve had faith in the company you’ve invested in and they’ve followed through, making a healthy profit to share with all their shareholders.


When a company shares its profits with its shareholders, the portions of money are called ‘dividends’.


With dividends come dividends tax, so you’ll need to know how to work this out and what responsibilities you have.


So, what do you need to know then? We’ve compiled a list of all the basics to keep you right.



Do I Get A Dividends Tax-Free Allowance?

The good news is that you get a tax-free allowance on your dividends.


For the 2018-19 tax period, you are entitled to a tax-free allowance of £2,000 on your dividends.


Here’s the bad news: it used to be a lot more.


Until the 6th of April 2018, you were entitled to £5,000 tax-free dividend allowance. Ouch.


However, if your dividends stand as your sole source of income, and they constitute no more than the current £11,850 tax-free personal allowance, then you won’t actually be taxed on any of it. After this limit, however, you will be taxed.



Are There Any Loopholes To Avoid Paying Dividends Tax?

Apart from the rare case that you have no other form of income and your dividends are lower than the personal allowance limit, there is only one legal loophole to get out of paying tax on dividends.


If you invest your dividends again in a stocks and shares ISA, they are safe from HMRC dividends tax.


If you opt for this, you need to be comfortable with the fact that you won’t be able to touch your money on a whim and that the value of your investment could go up and down drastically, potentially leaving you with less money at the end of the day.


You’ll also only be able to pay in £20,000 a year into the ISA, so if you have more than £22,000 in dividends, you will end up paying some tax.



What Is The Dividend Tax Rate?

Your dividends will be taxed according to the following bands and by accounting for your overall income from other sources too:


  • Basic Rate – 7.5% – Income between £11,850 and £46,000
  • Higher Rate – 32.5% – Income between £46,001 to £150,000
  • Additional Rate – 38.1% – Income over £150,000


HMRC will go through a process of ‘stacking’ your income to determine how much tax you are liable to pay. They’ll firstly count the income from your work, pensions and property, then from savings, and finally your income from dividends.


They’ll tax your ordinary income using the UK income tax band rates, and then stack your dividends on top as additional income, but taxing them at the dividend tax rates we have listed here.


For example, if you earned £30,000 salary and £30,000 in dividends, your salary would be taxed at the income tax basic rate of 20%, but the dividends that fall into the basic rate category will be taxed at 7.5%, and then the amount that falls into the higher rate will be taxed at 32.5%.


There are many calculators online that will break it down for you, including this one from Which?.



How Do I Pay?

How you go about paying your dividend tax depends on how much dividend income you earn.


If you earned £10,000 or less in dividends, you need to contact HMRC directly on their helpline and ask them to change your tax code to reflect your proper overall income. Alternatively, you could fill out a self-assessment tax return form.


If you earn over £10,000 in dividends, you need to fill in the self-assessment tax return form. HMRC will work out the rest and you’ll have different options to pay the taxable sum, including direct debit, credit card, and online banking, amongst others.



Still Need Assistance?

Whilst there’s a fair bit to remember and account for when it comes to dealing with your dividends, once you understand these basics, it should be smooth sailing.

If you are still in need of assistance, Tax IQ are happy to help. We are qualified accountants in Edinburgh and East Lothian who have been providing support for SMEs and individual taxpayers for over two decades. We have a wide range of services and packages, so if you have a tax and accountancy query, contact us today and we’ll see what we can do for you.