Tax on Dividends: how are Dividends taxed & how to Calculate it (2024)

As an investor, it pays to know how HMRC treats tax on dividends in the UK and what sort of impact it will have on your investments. You will learn everything you need to know about dividend taxation, the rules, and the strategies you can employ to safeguard your investments, here in this Moneyfarm Insights blog.

Tax rates for different types of dividends

If you own shares or stocks in various companies, you may have to pay tax on dividends in the UK. However, not if the dividend income falls within your personal tax allowance. In this case, you can enjoy dividend income each year without paying taxes.

As well as your personal allowance, you also have a dividend allowance. It used to be £5,000 but came down to £2,000 on the 6^th of April 2017. This allowance is used in addition to your personal allowance. So, if you earn £30,000 income from your employer and you also receive a dividend payment of £3,000, this is what happens – first salary-wise.

Your personal allowance is deducted from your annual salary. If you earn £30,000 per annum, you have a personal allowance of £12,570. The balance above that threshold (£17,430) is subject to income tax at the basic rate of 20%. It means, salary-wise, you will have to hand over £3,486 to the taxman, leaving you with £26,514.

Now let’s look at it from the angle of tax on dividends in the UK.

Calculation of tax on dividends

You can receive £2,000 of dividends per annum before the tax on dividends in the UK kicks in. In our example, you receive £3,000 in dividend payments. Deducting your dividend allowance of £2,000 leaves £1,000, which will be subject to tax.

The impact of personal tax allowances on dividend tax

As you are in the basic rate income tax band, your dividend balance is also subject to dividend tax at the basic rate, which is, at present, 8.75%. So, you’ll lose £87.50 of your £1,000 to the taxman, leaving you with £912. 50.

Your total (take home) income after you’ve paid income and dividend tax will be £27,426.5.

Our example is based on being a basic rate taxpayer. Here are all the tax thresholds and associated income and dividend rates for the 2022/2023 tax year.

Income tax bands in Scotland differ slightly, but the tax on dividends in Scotland is the same as in England.

For the purposes of dividend tax, the Scottish starter, basic, intermediary and part of the higher band up to £50,270 equate to the English basic rate (8.75%). Part of the Scottish higher rate band from £50,271 to £150,00 equates to the English higher rate of 33.75%, while the Scottish top rate (over £150K) equates to the English additional rate at 39.35%.

For the sake of simplicity, you can use a dividend tax calculator for UK dividends like the one on the income-tax.co.uk website.

If your dividend income for any tax year is above the threshold, you should contact HMRC to change your tax code if you want income tax to be removed from your wages or pension. Alternatively, you can complete a self-assessment tax return.

Taxation of foreign dividends

If you’re a UK resident and you’re worried about whether you have to pay tax on any dividend income from abroad, you needn’t be.

If you receive foreign income from foreign employment, pensions, or property rental, you should declare it by completing a self-assessment tax return. However, that doesn’t apply to foreign dividend income. The bottom line is that you don’t have to pay UK tax on foreign dividends.

Strategies to minimize tax on dividends

As well as income tax on dividends in the UK, you could also have to pay capital gains tax when you come to sell your shares. To establish whether or not you will be due to pay CGT, you must first work out if you have made a gain, which normally would be the difference between how much you paid for your shares and how much you sold them for. You can find out more on the “Tax when you sell shares” page on the gov.uk website.

If you hold your shares in a tax wrapper like a Stocks and Shares ISA, you don’t have to pay any Capital Gains Tax. It’s also a way of earning monthly dividends free from income tax.

When considering how to invest money tax efficiently, ISAs are a good option. You don’t even have to declare them to HMRC.

Changes in tax rules and regulations over time

From 2023/2024, the allowance will fall to £1,000, and the year after, to £500 per annum.

What are dividend tax credits?

Limited companies can make use of dividend tax credits when it comes to tax on dividends in the UK. When limited companies pay dividends, they come from company profits. Therefore dividend on income tax in the UK becomes an issue, and it’s where dividend tax credits can be used. Dividend tax credits are used by shareholders as a way of offsetting the tax due on dividend income.

Dividends get paid at 90% of the sum you as a shareholder receive. The 10% balance is a tax credit. If you’re a basic rate taxpayer, there is no tax due. However, if you’re a higher or additional rate taxpayer, you will pay 33.75% or 39.35% tax, respectively, and it’s these figures against which you can offset the 10% dividend tax credit.

How dividend tax affects investment decisions

The big difference between the basic rate dividend threshold and higher and additional rate thresholds can have a significant influence on your investment strategy.

Given the tax-wrapper nature of Stocks and Shares ISAs, having an investment portfolio including an ISA containing some of the best dividend stocks in 2023 is a worthwhile consideration. This assumes that your investor profile has a reasonable risk tolerance, bearing in mind that the value of your investments could fall as well as rise.

Filing taxes on dividends and record-keeping requirements

If you have to file for tax on dividend income in the UK, you should do so by completing a self-assessment tax return, and it’s advisable to keep records. The HMRC general guide to keeping records of your tax return tells you all you need to know.

FAQ

What are some common sources of dividend income in the UK?

Some common sources of dividend income in the UK include stocks and shares, investment funds (unit trust & OEICs), exchange-traded funds (ETFs), real estate investment trusts (REITs), and Peer-to-peer lending that payout dividends.

What happens if my dividend income exceeds the dividend allowance in the UK?

Any amount of total dividend income that exceeds the dividend income in the UK will be taxed based on your income tax band. The tax rate on dividends over the allowance for basic rate taxpayers is 8.75%, higher rate taxpayers is 33.75%, and additional rate is taxpayers 39.35%. The current dividend allowance for the 2022/23 tax year is £2,000, while the dividend allowance for 2023/24 tax year is £1,000

How is dividend income taxed in the UK?

Tax on dividends in the UK is subject to special tax rules, which determine the amount of tax you need to pay on your dividend income.

How does the dividend tax in the UK compare to other countries?

The tax on dividends in the UK is relatively average compared to some other countries, particularly in Europe. For example, Belgium has a dividend tax of 30%. In Italy, Switzerland and Romania, the tax rate on dividend income is 26%, 35% and 5%, respectively. While in the United Kingdom, the tax rate on dividends ranges from 8.75% to 39.35%.

*Capital at risk. Tax treatment depends on your individual circ*mstances and may be subject to change in the future.