What are the taxes, rates and allowances on dividends?

Here's what you need to know to help you properly pay taxes on dividends

June 12, 2020

Two accountants calculating tax on dividends

What is a dividend and what is a dividend tax?

A dividend is money that's paid out by limited liability companies to investors, usually on a quarterly or annual basis.

These payouts are based on the quarterly profits of your company as well as the amount of stock you own. 

Dividends are calculated based on profits on profits not revenue - what is left in your company after all expenses have been paid.

Dividends can be either paid in cash or reinvested into your investment portfolio via dividend reinvestment.or via SCRIP dividends - which allow companies listed on the LSE to give investors additional shares instead of cash payouts.

Dividend tax refers to the rates by which those dividends are taxed according to HMRC. Each year, these tax rates may differ.

Dividend tax rates in 2018-19 and 2019-20

Directors glasses on paper calculating dividend rates

The current dividend tax rate is calculated via a combination of your income tax band and a dividend allowance. 

The dividend allowance is a tax break that individuals receive on the first £2,000 in dividends.

To calculate how much to pay in dividends, you have to understand income tax bands.

You will have to include dividends into your income to determine your tax band. Let's take a quick look at how £175 000 in dividend payments would be taxed in 2019. This example assumes that your dividends are your only source of income.

  • You will pay nothing for the first £2,000 due to the tax allowance.
  • You will pay 7.5% (basic rate) for £2,000 - £37,500.
  • You will pay 32.5% (high rate) for £37,500 - £150,000.
  • You will pay 38.1% (additional rate) for +£150,000.

So, you would pay a total of £48 099.

  • £0 for the first £2,000
  • £2,662 for £2,001 - £37,500
  • £35,912 for £37,501 - £150,000
  • £9,525 for + £150,000 
  • £48,099

That's a total tax rate of 27.4%.

The dividend tax allowance for the 2017/2018 tax year was £5,000. Changes went into effect on April 2018 that saw the tax allowance reduced to £2,000.

When is dividend tax payable?

The dividend allowance will lower your tax bill regardless of how much you earn in dividends. Whether you earn £50 or £500,000 in dividends, you won't have to pay taxes on the first £2,000 in dividends.

That being said, the dividend tax allowance for 2018/2019 taxes was £5,000. Changes went into effect on April 2018 that saw the tax allowance reduced to £2,000. This £3,000 tax allowance cut will impact you based upon your particular income band - or blend of income bands.

How do I pay dividend taxes?

There are two ways that you can pay dividend taxes. The exact way that you pay them will depend upon how much you earned in dividends. Dividend taxes are due at the same time as your self-assessment tax return.

Up to £10,000 in dividends

If you earned under £2,000 in dividends, you don't need to do anything or contact anyone. But, for amounts between £2,001 and £10,000, you will have to do one of two things.

  1. Contact the HMRC helpline
  2. Using a Self Assessment tax return

Over £10,000 in dividends

Anything you earn over £10,000 requires you to fill out a Self Assessment Tax Return.

You do not pay dividends on funds in an ISA or pension

You don't have to pay any dividends on funds in an ISA or a pension. And, you can shelter up to £20,000 in an ISA - making them a unique part of modern share investing. 

Since the rule change in 2015, ISAs - which are tax-free savings/investment accounts - can hold up to £20,000 worth of stocks. And, any dividends that are accrued on shares held in your ISA aren't taxed.

Do I pay capital gains tax on shares?

Yes and no. You will pay capital gains tax on shares from a sale. But, you do not need to pay capital gains tax on shares held within an ISA or pension.

Are you looking for help with dividend taxes?

At Forma, we're experts in helping freelancers and small businesses deal with their taxes. Whether that's dividends, accounting, or insurance - we've got your back. If you're in need of help, please do not hesitate to contact us.

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