Decoding Dividend Tax: Understanding How Your Earnings Get Taxed

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Dividends are financial rewards companies distribute to their shareholders, providing a share in the profits generated. As a form of income, dividends offer investors an opportunity to participate in the success of the business they have invested in. These payments can come in cash, additional shares, or other assets and are typically decided upon by the company’s board of directors.

How are Dividends Taxed?

You are not required to pay tax on dividend income that falls with your Allowance, which is the tax earned each year without being taxed. 

Additionally, you receive a dividend allowance annually. You only have to pay tax on dividend income that exceeds the dividend allowance.

You do not pay tax on dividends from shares in an ISA.

Dividend Allowance

Tax yearDividend allowance
6 April 2023 to 5 April 2024£1,000
6 April 2022 to 5 April 2023£2,000
6 April 2021 to 5 April 2022£2,000
6 April 2020 to 5 April 2021£2,000
6 April 2019 to 5 April 2020£2,000
6 April 2018 to 5 April 2019£2,000
6 April 2017 to 5 April 2018£5,000
6 April 2016 to 5 April 2017£5,000

Calculations for Income Tax Band from GOV.UK

The dividend allowance, which represents the amount of dividend income you can receive tax-free, is changing in the coming years. 

Working out Tax on Dividend?

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.

Tax bandTax rate on dividends over the allowance
Basic rate8.75%
Higher rate33.75%
Additional rate39.35%

Income Tax Band from GOV.UK

How to Calculate Dividend Income Tax Band?

You get £3,000 in dividends and earn £29,570 in wages in the 2022 to 2023 tax year.

This gives you a total income of £32,570.

You have a Personal Allowance of £12,570. 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
  • 8.75% tax on £1,000 of dividends

Calculations for Income Tax Band from GOV.UK

What are the rules for paying dividends?

You can enjoy tax-free dividend income within your Allowance, the maximum amount you can earn each year without paying taxes. Additionally, you will receive a dividend allowance annually. Any dividend income that exceeds this allowance will be subject to taxation.

Self-Assessment Tax Returns

The system of Self Assessment is employed by HM Revenue and Customs (HMRC) to gather Income Tax, which is typically deducted automatically from wages and pensions. However, individuals and businesses with additional income, such as COVID-19 grants and support payments, must declare it through a tax return.

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