TAX BASICS

What is the Dividend Taxation in the UK?

What is a dividend?

Just like any other source of income, you have to pay tax on dividends. However, the dividend taxation rates are lower than income from work or a pension. The dividend is the money paid back to the shareholders from a company’s profits. In order to pay dividends, a company must make a profit in the current and prior fiscal years. The dividends paid by the company cannot exceed the profits available in both years.

Profit is the money that remains after deducting all business expenses and liabilities, as well as any unpaid taxes (such as Corporation Tax and VAT). However, keep in mind that you cannot claim dividends as a business expense for determining Corporation Tax. Paying dividends when your firm does not have enough profit after tax to meet the dividend amount is an offence.

Dividends can be an excellent way to generate consistent income from your investments. But you have to pay tax just like any other source of income. Although dividends are taxed at a lower rate than income from work or a pension, the government announced in September 2021 that dividend tax rates will be increased by 1.25 percentage points beginning on April 6, 2022, to support the NHS and Social Care.

What is the dividend taxation rates for 2020-2021?

You will not have to pay any tax on dividend income up to £2,000 in the 2021-22 tax year. This is the tax-free dividend allowance. In 2017-18, the allowance was reduced from £5,000. Above this tax-free allowance for dividend income, you pay tax at the rate you pay on your other income. It is known as ‘tax band’ or, in some cases, as the marginal tax rate.’

You can avoid paying tax on your investment income if you keep your shares or funds in an Isa. If your only source of income is from investments, you can also use your tax-free personal allowance before beginning to pay tax on dividends. So, in addition to the £2,000 dividend allowance, you could earn an additional £12,570 tax-free in 2021-22 (an increase from £12,500 in 2020-21). This is your personal stipend. The table below shows the dividend taxation rates in 2021-22 for basic, higher, and additional rate taxpayers and how they will change in 2022-23. 

Tax Rate 2021-22 2022-23 From To

Basic Rate 7.5% 8.75% £2,000 £37,500

Higher Rate 32.5% 33.75% £37,501 £150,000

Additional Rate 38.1% 39.35% £150,000+

How much dividend is tax-free?

You can earn up to £2,000 in dividends before paying Income Tax on them in the 2021/22 and 2020/21 tax years, which is in addition to your Tax-Free Personal Allowance of £12,570 in the 2021/22 tax year and £12,500 in the 2020/21 tax year.

The tax-free dividend allowance is only applicable to dividend income. It was implemented in 2016 and replaced the previous system of dividend tax credits. It is intended to eliminate some of the double taxations that occurs when corporations pay dividends from taxed profits. Dividend tax rates are also lower than personal tax rates. As a result, limited company directors frequently use a combination of salary and dividends to pay themselves tax-efficiently.

When will I have to pay the higher tax rate?

The government declared in September 2021 that beginning on April 6, 2022, dividend taxation rates would be raised by 1.25 percentage points. Dividends taken as income in the 2022-23 tax year will be subject to the new rates. Your dividend tax bill will increase starting April 6, 2022, if you pay tax on dividend income through your tax code. However, if you pay tax through a self-assessment tax return, you’ll have until January 31, 2024, to pay the higher dividend tax rates on your dividend income for the years 2022-23.

How to calculate dividend taxation in 2020-2021?

You get £3,000 in dividends and earn £29,570 in wages in the 2020 to 2021 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 that 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

Do I also need to pay Capital Gains Tax?

When the time comes to sell your shares, you may have to pay taxes on any profits you make. This is a capital gains tax (CGT). Capital gains, like dividends, have an annual tax-free allowance. This is £12,300 in 2021-22, the same as it was in 2020-21. If your profit from selling your shares is less than this amount, you will not have to pay tax. You have to pay a tax rate of 10% if you are a basic rate taxpayer and your profit exceeds the limit. If you are a higher or additional rate taxpayer you will have to pay 20% on your profit.

Feel free to get in touch with us for any further clarifications.

Sidharth Bharthan Menon
CEO, taxtotal​