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Dividend Tax - What Are The Important Things To Know?

If you own shares in a company, it’s likely that you’re entitled to dividends to be paid out on them. Any income you receive from your dividends will be subjected to dividend tax.

While the tax rate is lower than that on wages, you will still need to take it into account.

What are the dividend tax rates?

The good news is that there is a £2,000 tax allowance on dividends, so you won’t have to pay any taxes on the first £2,000 you receive.

Any income received after this amount will be taxed in accordance with your tax band (Figures correct as of May 2022):

  • Basic-rate - 8.75%
  • Higher-rate - 33.75%
  • Additional-rate - 39.35%

The tax rate you’ll be paying depends on how much income and capital gains you’ve received in the given year. Because your full income is taken into account, so is your personal tax allowance of £12,570.

Which tax rate will I be paying?

The tax rate you’ll be paying depends on the income bracket you’re in:

  • Income less than £12,570 falls within the personal allowance, so you won’t pay any tax.
  • Income between £12,570 and £50,270 is in the basic-rate bracket.
  • Income between £50,270 and £150,000 is in the higher-rate bracket.
  • Income above £150,000 is in the additional-rate bracket.

As an additional complication to this, you’ll lose £1 of the personal allowance for each £2 you earn over £100,000.

How do I work out how much tax I’ll be paying?

This is the complicated bit because you need to look at your entire income tax bill.

HMRC will “stack” your income by type:

  1. Income from your work, pension, property
  2. Savings income
  3. Dividends

Any capital gains will be calculated after your income tax.

This can work in your favour because it generally means that your dividends will be taxed at the highest rate rather than your other income. Don’t forget that dividend tax is lower than tax on other income, so your tax bill can be lower overall.

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