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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 £2,000 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.
As of March 2022, the dividend allowance is £2,000.
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 £2,000 dividend allowance (May 2022). 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 2022/2023, you have a £2,000 tax-free dividend allowance. Once that is used up, dividends are taxed based on your income tax band.
- Basic rate: 7.5%
- Higher rate: 32.5%
- Additional rate: 38.1%
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 2022/2023 tax year, you’ll have until 31 January 2023 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 is rising from 6 April 2022 (2), so we’ve included a table here showing the rate for 2022/2023 and the increased rate for 2023/24 onwards.
Remember, you get a £2,000 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.
|Tax band||Dividend tax rate (21/22)||Dividend tax rate (22/23)|
|Basic rate (£12,570–£50,270)||7.5%||8.75%|
|Higher rate (£50,271–£150,000)||32.5%||33.75%|
|Additional rate (over £150,000)||38.1%||39.35%|
When will the tax rates change?
Dividend tax rates are rising in April 2022. The government is adding an additional 1.25 percentage points to dividend tax to support the NHS, health and social care.
The new rates from April 2022 will be:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
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.
When will I have to pay the higher dividend tax rates?
Higher dividend tax rates come into force from 6 April 2022. All dividend tax rates are rising by 1.25 percentage points from this date. The new rates will be:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
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.
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 £2,000 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.
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