Understanding Dividend Taxation
Detailed overview of how dividends are taxed?
Dividends are payments made to shareholders in a company out of the profit it makes. Dividends can only be paid through the profits of a company and are not allowable as expenses for tax purposes. Read our article to understand how dividends are taxed?
How are dividends taxed?
Individuals who are shareholders receive a tax-free dividend allowance each tax year, if dividend income received exceeds the allowance limit, the individual is required to pay dividend taxes based on set rates and thresholds.
If you own shares in an Investment Saving Account (ISA), your dividend income will not be taxed.
Video: How are Dividends Taxed?
You can also watch our video instead to learn how dividends taxed?
What are the Tax-free Dividend allowances for the past 4 tax years?
|Allowance on dividend income (£)||Tax period|
|5000||6 April 2016-5 April 2017|
|5000||6 April 2017 to 5 April 2018|
|2000||6 April 2018 to 5 April 2019|
|2000||6 April 2019 to 5 April 2020|
Dividends before 6 April 2019 were subject to different rules
What are Tax bands?
You need to first determine the tax band you fall in. By adding your dividend income to your taxable income from other sources (can be single or multiple), you can find out the tax band you fall in. You may be liable to pay taxes at multiple rates in some instances. You can view the tax bands and allowances in detail here.
|Tax Band||Dividend Tax Rate 19/20|
Dividends under the personal allowance limit:
Any dividend income that falls within the range of your personal allowance will not be factored in your dividend allowance when calculating your tax liability.
How to work out the tax rate? (Example)
Suppose that your total income (other than dividend) is £34,000 and you are about to receive an income of £4000 from your dividends during the year 2019 to 2020. As for the year 2019-2020, your dividend allowance is £2000, which means that the remaining £ 2000 is taxable dividend income. To determine what tax rate is applicable to your dividend income, you will add £34000 to £4000, which takes the figure to £38,000. The total income falls within the basic tax band which implies that a rate of 7.5% will be levied on the £2000 income generated as dividends.
What are the two ways to pay tax on your dividend income?
The way you will pay tax on your dividend income depends upon the amount of income you receive from dividends in a tax year.
1. For £10,000 or less:
If your dividend income in a tax year is up to £10,000 then you need to inform HMRC either by contacting them through their helpline, requesting HMRC to change your tax code (Tax will be deducted from your wages or pension), or including it in your self-assessment tax return.
However, if your dividend income is equal to or does not exceed your dividend allowance, then you are not liable to inform HMRC.
2. For over £10,000:
If your dividend income in a tax year is over £ 10,000 then you have to file a self-assessment tax return to HMRC for each tax year.
If you are unregistered for self-assessment you will need to get yourself registered.
You’ll receive a letter that states the instructions about further steps that need to be taken after you have registered.
Do companies pay tax on dividends?
Companies do not pay tax on dividends, only shareholders who are given dividends by companies on the share that they hold are liable to dividend tax based on factors such as their total income and the amount of dividend income provided.
Do I need to pay taxes if I sell my shares?
Yes, you are liable to pay taxes if you sell your shares for which you might have been receiving dividends. Capital gains tax is normally payable on gains made by selling shares.
Dividend Income can get tricky especially when you have multiple sources of incomes and dividend income from multiple sources. It is therefore advisable to seek help from an expert such as a Tax Accountant, Accountant or a Personal Tax Accountant.
Clear House Accountants are specialist Accountants in London, our expertise of working with sole-traders and individuals on their tax returns has given us the capability to provide smart solutions to all your tax problems.