TAX ON DIVIDENDS: The information in this guide explains how share dividends get taxed.
Receiving a dividend payment is one method of taking money out of a limited company. You can issue dividends out of any profits to the shareholders.
There is no tax to pay on the first £2,000 of dividends received in the tax year (April 6th to April 5th the following year).
But, there may be taxes on dividends above this allowance. The amount of tax you must pay depends on your Income Tax band.
Thus, you will need to add income from share dividends to other taxable income when you work out how much to pay. In some cases, there may be taxation due at more than one rate.
- Basic Rate Tax Band: 8.75% on dividends over your allowance.
- Higher Rate Tax Band: 33.75% on dividends over your allowance.
- Additional Rate Tax Band: 39.35% on dividends over your allowance.
Note: Income Tax is exempt from dividends received from shares in Individual Savings Accounts. The rules for paying tax on share dividends differ in tax years before April 2018 (see below).
You may have dividends that fall within your Personal Allowance. In this case, they do not count towards the dividend allowance of £2,000.
Paying Tax on Dividends
The method of payment for taxation will depend on how much dividend income you received in the tax year. But, there is no need to do anything or to pay any tax on dividends less than £2,000.
Dividend Payments between £2,000 and £10,000
If the share dividend payment is over £2,000 but less than £10,000 you will need to inform HMRC. You can achieve this by:
Dividend Payments over £10,000
If you received a share dividend over £10,000 you must fill in a Self Assessment tax return. That means you will need to register for Self Assessment if you do not usually send this type of tax return.
You must register before the 5th of October following the tax year that you received the income. Once you have registered they will send out a letter with more information on the next step.
Note: There may be an amount of Capital Gains Tax to pay if you sell any of your shares.
Dividend Tax Rates before 6th April 2016
Different rules for paying tax on dividends applied before the 6th of April 2016. The amount of tax you must pay depends on your Income Tax band.
You will need to add income from share dividends to other taxable income when you work out how much to pay. In some cases, there may be taxation due at more than one rate.
- Basic Rate Tax Band (and non-taxpayers): 0% effective dividend tax rate.
- Higher Rate Tax Band: 25% effective dividend tax rate.
- Additional Rate Tax Band: 30.56% effective dividend tax rate.
- Additional Rate on Dividends Paid before April 2013: 36.11% effective dividend tax rate.
Calculating Tax on Share Dividends
You should have received a voucher as part of the share dividend paperwork. As a rule, the dividend voucher shows:
- The names of all shareholders getting paid a dividend and the amount of each share dividend.
- A ‘tax credit’ (one-ninth of the dividend).
You work out the tax owed by multiplying the dividend amount by the effective tax rate. In this case you should ignore the tax credit.
Fill in the ‘Dividends‘ section of the return if you are someone who needs to file a tax return. Contact HMRC helpline if you do not need to send one.
HM Revenue and Customs will then inform you of the amount owing. Their figure gets based on the report you send in and the current share dividend tax rates.