Before we start - it is important to understand the terms. What is a dividend? A dividend is a sum of money that is paid by a company to a person who has shares in the company - i.e. a shareholder. This money is typically paid out of the company profits or reserves. The tax on these dividends are paid out based on the rate that has been set by HMRC.
How are dividends taxed?
There are certain tax allowances you should be aware of. Shareholders do not pay tax on any dividend that falls within your Personal Allowance (£12,500) and in addition to this you get a dividend allowance each year (£2000) meaning that you only pay tax on an dividend income above the dividend allowance.
What is the dividend tax rate?
For this 2020/21 tax year, no changes have been made to the dividend tax rate. The current dividend allowance is £2,000. How much tax you pay for on dividends above the dividend allowance depends on your income tax band:
Basic Rate [£12,501 to £50,000] pay 7.5% on dividends Higher Rate [£50,001 to £150,000] pay 32.5% on dividends Additional Rate [over £150,000] pay 38.1% on dividends
To work out your tax band, add your total dividend income to your other income - being aware that you may pay tax at more than one rate.
Example (as seen on Gov.uk)
You get £3,000 in dividends and earn £29,500 in wages in the 2019 to 2020 tax year. This gives you a total income of £32,500. You have a Personal Allowance of £12,500. Take this off your total income to leave a taxable income of £20,000. This is in the basic rate tax band, so you would pay: 20% tax on £17,000 of wages no tax on £2,000 of dividends, because of the dividend allowance 7.5% tax on £1,000 of dividends
How does one pay his or her tax on dividends?
The taxes that you pay is dependent on the amount of dividend income that you received for the tax year. If you have received up to £10,000 in dividends you have 3 options: 1) you can tell HRMC by contacting the helpline; 2) ask HMRC to change your tax code so that the tax is automatically taken out of your wages and pension or 3) put it in your Self-Assessment tax return, if you have already filled one in. Please be aware that you do not need to tell HMRC if your dividends are within the dividend allowance for the tax year. If you are lucky enough to have received dividends of over £10,000, then you are required to fill out a Self-Assessment tax return. If it is not something that you usually do, be aware that you need to register with HMRC on or before October 5 right after the tax year that the dividend was received. Once registration is done, a letter will be sent to you with the information on what to do next. In conclusion, dividends are paid to shareholders from the profits or reserves of companies and it is very important to know what the tax implications of these dividends are to avoid paying to little or too much tax.
published under Business Address Guides
