What is the Dividend Allowance?
The Dividend Allowance refers to the maximum amount of dividends that you can receive without having to pay any tax on that income.
If you are entitled to the dividend allowance you will not be required to pay tax on dividends up to the threshold set by the allowance.
All taxpayers can access the same dividend allowance regardless of your tax rate and how much income you earn from other sources like PAYE income or from a private pension.
Dividends earned through tax free cash individual savings accounts (ISAs) are free from income tax and don’t need to be included in your dividend calculations for tax purposes.
How much is the dividend allowance worth?
The dividend allowance is worth £500 for all individuals which has been reduced from the previous dividend tax allowance of £1000.
You are unable to carry forward the dividend allowance into a future tax year or backdate it if you haven’t made use of it in a previous tax year.
Can I use the personal allowance against dividend income?
The dividend tax allowance is different from your tax free personal allowance but can be used in conjunction with it.
You are allowed to add your personal allowance to the dividend allowance to increase your overall tax free income.
At April 2024 the basic personal allowance is set at £12,570 per person which means in cases where the only income you have is from dividends you can earn a total of £13,070 without having to pay any income tax.
If you have income other than dividends your tax free personal allowance will normally be used in part or in full against that income as a default.
Your personal allowance doesn’t affect your dividend allowance so you can be sure that the dividend allowance you are given is kept intact and available to use against your dividend income.
How much tax do I pay on dividends?
The amount of tax you pay on dividends is dependant on the rate or rates of income tax that you pay on other income.
Irrespective of the tax rate applied to your income the value of your dividend allowance will remain unchanged.
After you have used up your dividend allowance and tax free personal allowance you will be subject to dividend tax which is divided into three different income tax rates:
- Basic rate tax: £12,571 to £50,270 @ 20% tax rate.
- Higher rate tax: £50,271 to £125,140 @ 40% tax rate.
- Additional rate tax: Over £125,140 @ 45% tax rate.
Do I declare dividends on a tax return?
Individuals who already complete a tax return and have dividend income over the dividend allowance should enter income from dividends on their self assessment tax return.
HMRC doesn’t need you to declare dividend income that is worth £500 or less (below the dividend allowance threshold) on your tax return.
You need to declare your dividends on the tax return that relates to the tax year that you received them.
The tax owed on your dividend income will form part of your overall tax position as per your tax return.
Any dividend tax owed should be paid through self assessment at the same time as tax payable from any other sources declared on your tax return.
The tax return software you or your accountant uses will apply the dividend allowance automatically as part of your tax return calculations.
How do I pay dividend tax?
How you pay income tax on your dividends will depend on whether you already complete a self assessment tax return and the value of your dividends.
When it comes to paying tax on your dividend income there are generally three situations to consider.
For dividend income of £500 or less you shouldn’t have to pay any taxes as it falls under the tax-free dividend allowance.
If your dividend income falls between £501 and £10,000 you are required to report it to HMRC.
Here are the guidelines provided by HMRC for declaring dividend income and paying your dividend tax bill:
- Call HMRC on 0300 200 3300 to adjust your tax code and ensure that the dividend tax is deducted from your salary or pension.
This is done by HMRC issuing a new tax code to your employer or pension provider who will then use it to deduct the dividend tax owed through their payroll.
- Include your dividend income in your self assessment tax return if you already complete one.
- In the case of dividend income exceeding £10,000 the only option is to declare it on a self assessment tax return.
If you already complete a tax return you can include your dividend income in the same return.
If you don’t currently file a tax return you must register for self assessment and include your dividend income along with any other taxable income in your tax return.
What is classed as a dividend?
A dividend refers to the allocation of a company’s profits to shareholders who meet the eligibility criteria.
The board of directors is responsible for deciding on the amount and timing of dividend payments.
The distribution of dividends must be done in proportion to the percentage of shares owned by each individual shareholder.
Dividend income can come in the form of a stock market investor becoming a company shareholder who is then paid dividends as a financial reward for their investment in the company.
Setting up a limited company and becoming a director who holds shares in that company is another way to receive dividend income.
Individuals serving as a company director and shareholder can allocate dividends if there are profits available from the current or previous tax year.
