If you receive dividends or have a Limited Company and pay yourself a dividend, then here’s everything you need to know about the UK Dividend Tax Rates for 2020/2021.
The information contained in this post is for guidance and information purposes only. It should not be relied upon as professional accounting, tax and legal advice. For specific advice relevant to your own situation, always contact a professional.
What is a Dividend?
A dividend is a payment made to the shareholders of a registered Company. It is a distribution made from a business after all its costs and taxes are accounted for.
Dividends generally cannot be paid if a business has made a loss or has insufficient reserves on the balance sheet. And any payments of this nature will be deemed illegal. People receive dividends when they invest money or own shares in a Company.
Many people who are self-employed and operate through a Limited Company often choose to pay themselves through a combination of payroll salary and dividend. That’s because there are certain tax advantages they can use to minimise their tax bill.
Do you Pay Tax on UK Dividends?
The UK dividend allowance is one of the many tax allowances and reliefs available. That’s an amount you can earn from dividends tax-free. For 2020/2021 the dividend allowance is £2,000. On top of the UK dividend allowance of £2,000, you are also entitled to put your personal allowance against your dividend earnings. Unless, of course, you have used it elsewhere.
What are the UK Dividend Tax Rates
Once your allowances are used up you’ll start to pay income tax on your dividend income at the dividend tax rates which, for the 2020/2021 tax year are:
|Basic Rate||£12,501 to £50,000||7.5%|
|Higher Rate||£50,001 to £150,000||32.5%|
|Additional Rate||over £150,000||38.1%|
How Are Dividends Taxed
You are taxed according to which income tax band you fall into when you add your dividend income to all your other income.
Here’s an example:
Laura works for herself as a self-employed social media marketing manager and has set up a Limited Company. During the tax year 2020/2021 she paid herself a salary of £12,500 and a dividend of £20,000 from her Limited Company.
Laura has no other forms of income so her tax bill will be worked out as follows:
|Employment Income||Dividend Income|
|Tax Rate (basic rate)||20%||7.5%|
|Income tax payable||0||£1,350|
How Do You Pay Dividend Tax?
If you need to pay dividend tax, then the way you report it to HMRC depend on how much you receive each tax year.
Up to £10,000 in dividends
If you receive up to £10,000 in dividends and have a PAYE job, then you don’t need to submit a tax return. Instead, you can contact HMRC on 0300 200 3300 and ask them to adjust your tax code, so your tax is taken out from your salary at source.
If you earn less than the UK Dividend Allowance (£2,000 for 2020/2021) you don’t need to tell HMRC anything.
If you are not employed and earn more than the dividend allowance, you’ll need to submit a tax return.
If you haven’t already done so, you’ll need to register with HMRC so you can submit a tax return by 5 October following the tax year you started receiving dividends or you went over the UK dividend allowance.
Over £10,000 in dividends
If you earn more than £10,000 you’ll need to fill in a self-assessment tax return. As above, you’ll need to register with HMRC by the 5 October following the tax year you started receiving dividends.
Dividend Tax Voucher Template UK
If you are running a Limited Company then you’ll need to make sure you comply with the legal requirements when you pay a dividend, even though it is to yourself.
You’ll need to issue paperwork to support your dividend including:
- Holding a directors meeting to declare the dividend;
- Writing up minutes of that meeting;
- Preparing a dividend tax voucher.
Here is a dividend tax voucher template for you to fill out and keep on file for your Limited Company.