If you own shares, it’s likely that the company will pay a dividend (a share of the profits). How dividends are taxed from April 2016 changed and the allowance fell in April 2018. It will affect you if you invest or own your own limited company.
How dividends are taxed
Since April 6th 2018 you have been able to receive £2,000 a year in dividend payments without paying tax (this is frozen at £2,000 for the tax year 2019-20). But anything you receive above that is taxed. The rates are:
- 7.5% for any dividend payments in the basic rate tax band.
- 32.5% for any dividend payments in the higher rate tax band.
- 38.1% for any dividend payments in the additional rate tax band.
SAVVY TIP: This doesn’t apply to dividend payments from shares held within an ISA as these are free of tax.
How much worse off will you be?
The amount of money that you will lose because the dividend allowance falls will depend on how much you receive in dividends and the tax band that the first £5,000 of dividends you take falls in. The change in April 2018 means only the first £2,000 of that £5,000 will be tax free.
- If you pay tax at the basic rate, you will be £225 worse off.
- If you pay tax at the higher (40%) rate, you will be £975 worse off.
- If you pay tax at the additional rate, you will be £1,043 worse off.
SAVVY TIP: In the tax year April 2017 – 18, you were able to earn up to £16,500 a year and pay no tax if you have no other income. That was made up of £11,000 from the personal allowance and £5,000 in dividend allowance. In the tax year 2019 – 20, you are able to earn up to £14,500 (£12,500 in personal allowance and £2,000 in dividend allowance).
The dividend allowance and tax
Even though you don’t pay tax on up to £2,000 of dividends, it still counts towards your personal allowance or the relevant tax band. So, if you live in England, Wales or Northern Ireland and earn £12,500 a year but receive £40,000 a year in dividends perhaps because you rely on investments (or run your own limited company), you would:
- Pay no tax on £12,500 salary.
- Take £2,000 of dividends without paying tax.
- Pay tax at 7.5% on £35,500 of dividends.
- Pay tax at 32.5% on £2,500 of dividends.
Pay tax on the other £38,000 of dividends. The basic rate tax band is £37,500 (£50,000 – £12,500). However, you only have £35,500 of that band left as you’ve used your £2,000 dividend allowance. You would pay tax at the higher rate on £2,500 of dividends.
Tax on dividends if you live in Scotland
In Scotland there are five tax bands (below). However, these only apply to your salary, pension and some other earnings.
- Personal allowance: £12,500. This is the part of your earnings or income that you don’t pay tax on.
- Starter rate: If you earn between £12,500 and £14,549, you pay tax at 19% on those earnings.
- Basic rate: You pay tax at 20% on your earnings between £14,549 and £24,944.
- Intermediate rate: You pay tax at 21% on earnings between £24,944 and £43,430.
- Higher rate: You pay tax at 41% on earnings between £43,430 and £150,000.
- Top rate: If you earn more than £150,000 a year, you’ll pay tax at 46% on those earnings.
However, in respect of your dividend earnings, you pay tax at the rates and using the thresholds that apply to the rest of the UK. So your tax bill will be partly calculated using Scottish tax bands, but calculated using the UK-wide dividend tax allowances and rates if you receive dividends.
Telling HM Revenue and Customs about dividends
How you pay tax on your dividends depends on the amount of dividends you receive.
- If you receive less than £2,000 a year in dividends, you don’t need to tell HM Revenue and Customs.
- If you receive between £2,000 and £10,000 a year in dividends, you must tell HMRC. You can ask them to adjust your tax code so you pay the extra tax through PAYE via your salary or pension. Otherwise you have to fill in a self-assessment tax return.
- If you receive more than £10,000 a year in dividends you have to fill in a self assessment tax return.
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