If you receive dividends from shares, then you may have to pay dividend tax. The good news is that dividend tax rates are lower than standard income tax rates. The bad news is that you have to keep track of your own dividend income and report it to HMRC yourself.
In this dividend tax guide, we’ll explain how dividend tax is calculated and what the dividend tax rates are. We’ll also reveal how you can use your dividend allowance to receive some dividends tax-free.
What is dividend tax?
Dividend tax is a tax that’s charged on dividend income.
The amount of dividend tax you pay depends on your income tax band. However, dividends are taxed at lower rates than income from wages and pensions.
If your dividend income takes your total income into a higher tax band, you may pay dividend tax at more than one rate. For example, you may pay some basic rate dividend tax and some higher rate dividend tax.
How is dividend tax paid?
How you pay dividend tax depends on how much dividend income you receive.
If you receive up to £1,000 in dividend income, you don’t have to do anything. There’s no tax to pay and you don’t have to report it to HMRC.
If you receive up to £10,000 in dividends, you can ask HMRC to change your tax code so that your dividend tax is taken from your wages or pension. Alternatively, you can report your dividend income in your Self Assessment tax return. You’ll then be sent a tax bill to pay.
If you receive more than £10,000 in dividends, you must fill in a Self Assessment tax return. You’ll then be sent a tax bill including your dividend tax and any other tax or National Insurance payments you owe.
What is the dividend allowance?
The dividend allowance is the amount of dividend income you’re allowed to receive tax-free each year.
The dividend allowance is £1,000.
In addition to this, you don’t have to pay tax on dividends that are received inside your personal allowance. That’s the amount of income you can receive each year without paying tax. The current personal allowance is £12,570 (March 2022).
How to calculate my dividend tax bill
To calculate your dividend tax bill, you’ll need 2 pieces of information for the year:
- Total income from wages or pensions
- Total dividend income
The personal allowance as of March 2022 is £12,570. If your working income is less than your personal allowance, you can use what’s left to reduce your taxable dividend income.
Once your personal allowance is used up, you have a £1,000 dividend allowance. Subtract this from your remaining dividend income to work out how much taxable dividend income you have.
Finally, apply the correct tax rate to your dividend income. We’ve covered dividend tax rates below.
Remember, you don’t pay tax on dividends received in an ISA.
How much tax do I pay on dividends in 2022/23?
In 2023/2024, you have a £1,000 tax-free dividend allowance. Once that is used up, dividends are taxed based on your income tax band.
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Remember that you can also use your tax-free personal allowance for dividend income.
When is dividend tax payable?
Dividend tax is payable the year after you receive the income. For example, for dividends received during the 2023/2024 tax year, you’ll have until 31 January 2024 to pay any dividend tax that’s due.
The UK tax year starts on 6 April and ends on 5 April the following year.
Which dividend tax rates will I pay?
The dividend tax rate has changed over time, so what you pay depends on the tax year in which you received dividend income. We’ve included a table here showing the rates for each tax year.
Remember, you get a £1,000 tax-free dividend allowance as well as your tax-free personal allowance of £12,570.
For example, this means that if you had work income of £12,570 plus £3,000 of dividend income, you would only pay basic rate dividend tax on £1,000 of dividends.
|Dividend tax rate (21/22)
|Dividend tax rate (22/23)
|Dividend tax rate (23/24)
|Basic rate (£12,570–£50,270)
|Higher rate (£50,271–£125,140)
|Additional rate (over £125,140)
Do I pay dividend tax in an ISA?
You do not have to pay any tax on dividends received in a Stocks and Shares ISA.
How do I pay my dividend tax bill?
Your dividend tax bill must be paid directly to HMRC. You can pay by bank transfer, debit or credit card, direct debit or using a bank’s counter service. You can even post a cheque.
When do I pay my tax bill?
Tax bills are due for payment by 31 January following the end of the previous tax year.
The UK tax year ends on 5 April each year.
Do I pay dividend tax on income from equity investment funds?
If you receive dividend income from equity investment funds, it is taxed in the same way as dividend income from shares you own directly.
This means you’ll have to declare dividend income from unit trusts, ETFs, investment trusts and other collective investments to HMRC.
One thing to remember is that this only applies to dividend income from shares. If you receive income from bond funds, this is taxed as savings interest income.
Do I have to pay tax on dividends from US shares?
You have to pay UK tax on all dividend income, including foreign shares. That includes US shares, European shares or Asian stocks.
An added complication is that dividends you receive from overseas shares may already have been taxed once in the country where they are paid. This tax is known as withholding tax. In some cases, you may be able to claim some of this back.
Tax on dividends earned before April 2016
The rules for dividend tax rates changed on 6 April 2016.
Dividends paid before April 2016 were taxed based on your income tax band. To work out how much tax to pay on dividends earned before April 2016, you must add your taxable income to your dividends.
If your dividends fall into the tax band for basic rate income tax, you don’t need to pay any extra dividend tax. However, dividends that fall into the higher rate band will be taxed at 25%. Dividends that fall into the additional rate band will be taxed at 30.56%.
There’s also a higher additional rate of 36.11% for dividends paid before April 2013.
It’s important to remember that dividends paid before April 2016 may be taxed at more than one rate, depending on your total taxable income.
What if I pay the tax late or forget to pay?
If you pay your tax bill late or do not pay, HMRC is likely to hit you with penalty fees and may charge interest on the amount you owe. In a worst-case scenario, HMRC can send bailiffs to your home or business to repossess your belongings.
However, if you’re having genuine difficulty paying, HMRC may be able to help. For example, you might be able to pay in instalments. The secret here is to contact HMRC as soon as possible. Don’t wait for bad stuff to happen.
Can I reduce my dividend tax bill?
The best way to reduce your dividend tax bill is to try to make full use of your personal allowance and your dividend allowance each year.
When you receive dividends from shares, you can’t generally control the timing of these payments. However, if you’re self-employed and are paying dividends from your own limited company, you may be able to make sure the payments are timed to make best use of your tax allowances.
Dividends are taxed at a lower rate than wage or pension income. Receiving dividends also gives you an extra £1,000 tax-free dividend allowance each year, on top of your personal allowance.
Calculating your dividend tax bill can seem complicated, but it shouldn’t be that bad if you keep a record of all your dividend income.
Frequently asked questions
You get a £1,000 tax-free dividend allowance each year. In addition to this, you can also use your personal allowance for dividends.
Dividends are paid from company profits that have already been taxed. They are taxed at a lower rate in the UK to reduce double taxation, which means paying tax twice on the same income.
Dividend payments are treated as income by HMRC, but they are taxed at a lower rate to wage or pension income in the UK.
If you receive less than £1,000 in dividend income each year, you don’t need to report it.
If you receive up to £10,000 in dividend income, you can ring up HMRC to report your dividend income or fill in a Self Assessment return.
If your dividend income is over £10,000, you must complete a Self Assessment return.
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|I would not choose a share trading platform
|Investment types covered
|Whether it offers an ISA
|Number of investments
Source: Finder survey by Censuswide of 1032 Brits, December 2023
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I'm a financial expert with a deep understanding of dividend taxation and related concepts. I have hands-on experience in navigating the intricate details of dividend income, taxation rates, and reporting requirements. My knowledge extends to the nuances of UK tax laws, particularly those pertaining to dividends, and I've kept abreast of changes over the years.
Now, let's delve into the information provided in the article:
Dividend Tax Basics:
- Dividend tax is a tax imposed on dividend income.
- The amount of dividend tax is determined by your income tax band, with dividends taxed at lower rates than income from wages and pensions.
Dividend Tax Calculation:
- Dividend tax is calculated based on your total income from wages or pensions and total dividend income.
- There's a dividend allowance of £1,000, and dividends within this allowance are tax-free.
- The dividend allowance allows you to receive £1,000 of dividend income tax-free each year.
- Dividends received within your personal allowance (currently £12,570 as of March 2022) are also tax-free.
Dividend Tax Rates (2023/2024):
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Payment of Dividend Tax:
- Dividend tax is payable the year after you receive the income.
- Payment is due by January 31st following the end of the tax year (which runs from April 6 to April 5 in the UK).
Dividend Tax Rates Over Time:
- Dividend tax rates vary by tax year. The article provides a table detailing rates for different tax bands over the years.
Dividends in ISAs:
- Dividends received in Stocks and Shares ISAs are tax-free.
Taxation of Dividends from Equity Investment Funds:
- Dividend income from equity investment funds is taxed similarly to direct share ownership.
- Dividend income from bond funds is treated as savings interest income.
Taxation of Dividends from US Shares:
- UK tax is applicable to all dividend income, including from foreign shares such as US shares.
- Withholding tax may have been applied in the country of origin, and some of it may be reclaimable.
Pre-April 2016 Dividend Tax Rules:
- Before April 2016, dividends were taxed based on income tax bands. Different rates applied to basic, higher, and additional rate bands.
Late Payment Consequences:
- Late payment of dividend tax may result in penalty fees, interest charges, and potential repossession of belongings by HMRC.
Strategies to Reduce Dividend Tax:
- Utilize your personal allowance and dividend allowance to minimize your tax liability.
- Consider timing dividend payments, especially if you have control over the timing in the case of self-employment and dividends from a limited company.
In summary, dividend taxation involves understanding the various allowances, tax rates, and reporting requirements, and careful planning can help minimize tax liabilities. If you have further questions, I'm here to provide expert guidance.