Do I need to pay tax on dividends?

Kirsty Young Tax

This question about paying tax on dividends comes up all the time with clients. Here’s the short answer:

Yes. You do need to pay personal income tax on your dividends in most cases.

 

A little history lesson – why dividends were awesome

There is a lot of out of date and conflicting information online about dividends and tax. So here’s a few words on the history of dividends so you know where it’s all coming from.

Years ago, paying yourself from your limited company via dividends was all the rage. This was mainly because you didn’t physically hand over any money when paying yourself in dividends up to the ‘basic rate’. (That basic rate is now £50,270 total income per year when combining this with your ‘tax free’ personal allowance).

So you paid (virtually) no tax on your first £50k or so, compared to someone who was paid a salary via a payroll.

You then paid around 25% – 36% in tax on your income above that, depending on how much you earned.

What’s more, anyone able to pay themselves dividends did not (and still don’t) pay any National Insurance contributions on dividends, which you do on most employment income.

 

All change in 2016

All this changed for the worse (from the view of the person receiving those dividends!) in 2016.

The reason it changed (in the opinion of the writer) was that there was a clear difference in the total tax paid between limited company owners able to pay themselves in dividends instead of ‘payrolled’ salary, and the rest of us.

 

So, do you pay tax on dividends now?

In basic terms, yes – most of the time. At the time of writing (in the 23/24 tax year), you have a personal ‘tax-free’ annual allowance of £12,570. Once you have used up that allowance, you will pay the following rates of tax on your dividends:

  • Basic Rate: 8.75%
  • Higher Rate: 33.75%
  • Additional Rate: 39.35%

An example:

If you wished to pay yourself £50k a year, and your only income was dividends, you would receive

  • Around £12,570 a year tax free (your personal allowance),
  • An additional ~£37k taxed at 8.75%.

If you wished to pay yourself more, and the dividends you received amounted to over £50,270, you start to pay the Higher Rate figure, and your dividends become taxed at 33.75%.

So, you would pay:

  • Around £12,570 a year tax free (your personal allowance)
  • An additional £37,700 taxed at 8.75%
  • Any dividend income above £50,271taxed at 33.75%

If you are lucky enough to earn over around £125k a year, any dividends over this amount are taxed at 39.35%.

Note: If you are reading this after the 23/24 tax year, the ‘bands’ of income have likely changed but the concept will be similar.

But it’s not quite that easy

As with all things tax, it’s not quite as simple as the above example. For example, there is a small ‘dividend allowance’ that gives you a little extra tax free. Also, other income you may have can change things. However, our example gives you a simple feel for what the tax might look like.

Dividends, corporation tax and profits

As a reminder, your company will still have to pay corporation tax on its profits, before these dividends can be paid to you. This bit of tax is the personal tax due from the person receiving the dividend. It’s important to keep track of profits to ensure that the company has actually made sufficient profits to award you a dividend.

For a reminder of some dividend basics, be sure to check out our blog on the subject.

 

How does the tax get paid on dividends?

You need to declare your dividends on your personal self-assessment tax return. You declare all your income in total, including these dividends.

The tax return will calculate the total tax due, and you pay this (usually) by 31st January following the end of the tax year (5th April). For more details see our article.

 

I’m still confused about dividends

We’re not surprised. That’s why we write articles like these to help our company-owning clients (and others) plan more tax efficient things to do, and help make their accounting and finances easier.

If you don’t have an accountant, or feel you aren’t making the most of dividend opportunities with your current accountant, we’d love a chat about how we can help.

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At the time of writing. Tax policies, rates, and governments can change a lot from budget to budget….