Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
How do your dividends get taxed?
When you own shares in a company, you sometimes receive dividends as a result. These dividends are payments paid to shareholders, usually to reflect the profit the company has made. If you receive dividend payments, you might have to pay additional tax as a result.
The first £5,000 of dividends you receive in a tax year (6th April to 5th April the following year) aren’t taxable. Above this £5,000 tax-free allowance, how much tax you pay will depend on which Income Tax band you are in. To work out how much tax you will pay on the income you receive from your dividends, you need to add it to all your other taxable income. Depending on your total income, you might have to pay at more than one tax rate. This only applies to dividends from April 2016.
The tax bands are as follows:
|Tax band||Tax rate on dividends over £5,000|
You don’t need to pay tax on shares which make up an ISA. Dividends which fall within your Personal Allowance don’t count towards the £5,000 dividend allowance.
To show you how the tax on your dividends is calculated, let’s look at a few examples.
If you receive less than £5,000 in share dividends in a tax year, you don’t pay any additional tax on those dividends.
If you receive dividends from shares in an ISA, you don’t pay any tax on that income, whichever income tax band you are in.
If you received non-dividend income of £6,500 and dividend income of £12,000 from non-ISA shares, you would have a total income of £18,500. £5,000 of the dividends would be under the £11,500 Personal Tax Allowance threshold. A further £5,000 would come within the Dividend Allowance, which would leave £2,000 of dividends to pay tax on. The tax would be paid at the Basic Rate of 7.5% on these.
If you received non-dividend income of £22,000 and receive dividend income of £6,000 from non-ISA shares, you wouldn’t have to pay any tax on the first £5,000 of your dividend income as it would be covered by the Dividend Allowance and you would pay tax on the remaining £1,000 at the Basic Rate of 7.5%.
How do you pay tax on dividends?
How you pay tax on your dividend income depends on how much dividend income you receive in a tax year.
You don’t need to do anything about dividend income which is less than £5,000. You don’t need to inform HMRC or pay any tax.
If your dividend income is between £5,000 and £10,000, you need to inform HMRC by calling their helpline. You then ask HMRC to change your tax code so that the tax can be taken out of your wages or pension. If you send a Self Assessment tax return, you will need to add this amount to your tax return. The HMRC Income Tax helpline number is 0300 200 3300 (textphone 0300 200 3319).
If your dividend income is greater than £10,000 in any given tax year, you will need to fill in a Self Assessment tax return, even if you don’t usually have to send a tax return. If you don’t already send a Self Assessment tax return, make sure you register by 5th October following the tax year in which you received the dividend income. Once you have registered for Self Assessment with HMRC, you will receive a letter telling you what to do next.
You might be liable to pay Capital Gains Tax if you sell your shares.
What about tax in dividends from before April 2016?
The rules about tax on dividends were different before 6th April 2016. To work out the tax owed for dividend payments before this date, you will be using different tax rates. You need to add your other taxable income to your dividend income to work out which Income Tax band they’re in. you might be liable to pay tax at more than one rate.
The tax rates for dividends were as follows:
|Tax band||Effective dividend tax rate|
|Basic rate (and non-taxpayers)||0%|
|Additional rate for dividends paid before April 2013||36.11%|
When you received the dividend, you would also have received a dividend voucher which would have shown the dividend amount as well as a ‘tax credit’ which is one-ninth of the dividend. To work out the tax you owe, multiply the dividend amount by the effective tax rate. The tax credit figure can be ignored.
If you need to pay tax on these dividends, you will need to send a Self Assessment tax return. You will need to fill in the ‘Dividends’ section. If you don’t already need to send a tax return, you will need to contact the HMRC Income Tax helpline on 0300 200 3300 (textphone 0300 200 3319). HMRC will then inform you of how much tax you owe, which will be based on the income you report as well as the dividend tax rates.
How can DSR Tax Claims help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.