What are the taxes, rates and allowances on dividends?

Chris Andreou

May 11, 2021

dividends taxes guide

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What are dividends, and what is 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—what is left in your company after all expenses have been paid—not revenue.

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 2020/21 and 2021/22

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. 

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.

Dividend allowance: 

For the 2021/22 and 2020/21 tax years, a dividend allowance of £2,000 is provided. This means that you only need to pay tax on dividends exceeding that amount. 

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

Personal allowance: 

For the 2021/22 tax year, the personal allowance is £12,570.

For the 2020/21 tax year, the personal allowance is £12,500.

Dividend tax thresholds:

The dividend tax rates and tax thresholds for the 2021/22 and 2020/ 21 financial years are indicated in the table above.

You may refer to the HMRC website for the dividend tax rates, income tax rates and income tax bands for the previous tax years.

Dividend tax calculation examples:

Let's take a quick look at how £175,000 in dividend payments would be taxed in the 2020/21 tax year.  

Our example below 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% (higher rate) for £37,501 - £150,000.
  • You will pay 38.1% (additional rate) for £150,001 - £175,000

So, you would pay a dividend tax amounting to £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%.

Here's another example for how £175,000 in dividend payments would be taxed in the 2021/22 tax year. As with the above calculation, our example below 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, 700.
  • You will pay 32.5% (higher rate) for £37, 701 - £150,000.
  • You will pay 38.1% (additional rate) for £150,001 - £175,000

Your dividend tax will amount to £48 700. Here's a breakdown of the calculation:

  • £0 for the first £2,000
  • £2,677.5 for £2,001 - £37, 700
  • £36,498 for £37, 701 - £150,000
  • £9,525 for £150,000 - £175,000

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Dividends Guide

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.

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.

Dividends Guide

What's Inside:

  • What are dividends?
  • Dividend tax rates and allowances
  • Paying taxes on dividends
  • Dividend FAQs
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Dividends Guide

What's Inside:

  • What are dividends?
  • Dividend tax rates and allowances
  • Paying taxes on dividends
  • Dividend FAQs

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.

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What are the taxes, rates and allowances on dividends? Guide

What are the taxes, rates and allowances on dividends?

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-what is left in your company after all expenses have been paid-not revenue.

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.

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  • What are dividends?
  • Dividend tax rates and allowances
  • Paying taxes on dividends
  • Dividend FAQs
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What are dividends and why are they important? Guide

What are dividends and why are they important?

A dividend is a payment of profit that a limited company distributes to its shareholders. This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.

Dividends are important as they are a tax-efficient way to pay yourself from your limited company. Other than drawing dividends as income, you may also consider paying dividends into a pension fund, ISA or to family members.

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What are dividends and dividend taxes? Guide

What are dividends and dividend taxes?

As a limited company director, you have greater flexibility to work around the tax system, and are able to implement tax optimisation strategies not available via other business structures.

One of these ways is to draw dividends from your company, as opposed to receiving a salary; doing so can help to reduce your tax bill.

If you're newly self-employed, this can be rather confusing.

You might be wondering: How can dividends help reduce my tax bill, and what taxes do I need to pay on them? Are there additional considerations I need to keep in mind?

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What is Dividend tax? Guide

What is 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.

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

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