What is UK Dividend Tax and How Does It Work?
If you own shares in a company, you can make money in two ways: by selling your shares when their value increases or by receiving dividends from the company. Dividends are a great way to earn a consistent income from your investments, but they are also subject to taxes. However, dividend taxation is generally lower compared to income from employment or a pension. When it comes to dividend tax in the UK, there are certain rates and allowances that you need to be aware of.
UK Dividend Tax Rates for 2024
As a shareholder, you must pay dividend tax to HMRC on any dividends you receive from a business. The rates for dividend tax in the UK for the tax year 2023–2024 are as follows:
- 0% on the first £1,000 in dividends
- 8.75% on dividends between £12,571 and £50,270 in the basic rate range
- 33.75% on dividends between £50,271 and £125,139 in the higher rate range
- 39.35% on dividends over £125,140 in the extra rate range
If your only source of income is from investments, you can utilize your tax-free personal allowance in addition to the £1,000 dividend allowance. For the tax year 2023–2024, the personal allowance is £12,570. This means you can earn an extra £12,570 tax-free on top of the £1,000 dividend allowance. To calculate your potential tax liability, you can use our dividend tax calculator.
How and When to Pay Dividend Tax
If your dividends exceed your tax-free allowance, you are required to pay tax on them. The dividend tax rates are determined by your income tax band. To pay dividend tax, you need to include the dividend income on your tax return. If you work and pay taxes through PAYE, you may need to file a self-assessment tax return to report your dividend income and pay any additional tax. The deadline for filing your tax return is typically the 31st of January after the end of the tax year.
Understanding the Dividend Allowance
The dividend allowance is the total amount of tax-free dividends you can earn in a year. For the tax year 2023–2024, the dividend allowance remains at £1,000. This means that regardless of any additional income you may have, you won’t have to pay taxes on profits up to this amount. It’s important to note that the dividend allowance can only be used for dividends, while the personal tax-free allowance can be used for various sources of income, including dividends.
Tax Rates and Dividend Income
The tax rates that apply to your taxable dividend income are determined by the amount of your earned income and saved income. Your taxable dividend income is taxed after these amounts. It’s important to include your dividend income when calculating your overall tax liability.
How to Pay Dividend Tax
You have several options for paying your dividend tax, including online or telephone banking, CHAPS, Bacs, debit card, credit card (with a 1.5% charge), cheque through the post, existing direct debit, new direct debit, and PAYE tax code. You can choose the method that is most convenient for you.
In Conclusion
Dividends are a tax-efficient method for UK limited company owners to extract cash from their company. When it comes to dividend tax, it’s important to understand the rates, allowances, and reporting requirements. By utilizing your tax-free allowances and accurately reporting your dividend income, you can minimize your tax liability and make the most of your investments.
