How much tax do you pay on dividends?

This blog will explain dividends and how much tax you pay.

What is a Shareholder?

A shareholder is/are a person who owns shares in a company.

Dividends – What are they?

When limited companies make a profit the profits are allocated to shareholders in dividends.  The dividends can only be distributed to the shareholder if the company has made a profit, and sufficient funds in the bank should they be paid.

The value of dividends allocated to each shareholder depends on the percentage of the company that they own.

Scenario –

Profit of Limited Company – £20,000

Shareholder 1 – 25% ownership

Shareholder 2 – 75% ownership

The profit would be split as £5,000 shareholder 1, £15,000 Shareholder 2

It is more tax efficient for a shareholder to take a combination of salary and dividends, as dividends are taxed at a lower rate than salary. However, National Insurance Contributions are not payable on dividends.

Tax Rates – What are the Tax Rates?

In short, it depends on the individual’s taxable income!

To start you would need to calculate the total taxable income, add up all funds received as income, deduct any allowable and the available personal allowance.

Dividends do not get added to this calculation as they are charged at a different rate of tax.  As an individual you will also be entitled to a dividend allowance of £2,000.

Currently for tax year 2022 / 2023 the dividend allowance is £2,000 and relates to the first £2,000 of the individual’s taxable dividend income.  Allocated dividends of £1 to £2,000 are taxed at a rate of 0%

Dividends received higher than £2,000 are taxed as follows:

Income Tax Rate for England, Wales & Northern Ireland are as follows:

In Scotland, the rate differ:

* Assuming the individual is in receipt of the Standard UK Personal Allowance.

Different allowances and rate apply to bank interest and dividend income.

Tax on Dividends – How much tax will you pay?

Below are a couple of scenarios that determine what tax is paid on dividends.

Scenario 1

Shareholder receives £1,500 dividends in 2022/2023.

The dividends is lower than £2,000 therefore falls in the nil rate and is not taxable.  No tax is due.

Scenario 2

A shareholder receives a dividend of £15,000 and has other income of £9,500.

The shareholder the following:

How to declare and pay your dividend tax?

You will not need to tell the HM Revenue & Customs (HMRC) if your dividends fall below the dividend tax-free allowance of £2,000.

Any dividends that are between £2,000 and £10,000, you can call HMRC on 0300 200 3300 and request a change to your PAYE tax code.  Or if you prefer, provide your dividends by filling in a Self-Assessment tax return.

Dividends over £10,000 must be declared on a Self-Assessment tax return.  If not registered for Self-Assessment, you will need to do so by 5th October after the tax year which the dividend payment was received.

All the information above does not take into consideration any Capital Gains Tax (CGT) that may need to be paid if you sell your shares.

Need Advice?

Mercury Accounting can provide advice on dividends and tax planning.  To find out more about our services or to book a free no obligation consultation call.

This blog is intended to inform and rather than advise and is based on legislation and practice at the time of publish. 

 

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