Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What is a Dividend?
A dividend is a payment made to shareholders of a company from post-tax profits. It is a form of taxable income in the UK and is subject to dividend tax so might need to be reported on a self-assessment tax return.
Do You Pay Income Tax on UK Dividends?
Dividends are subject to income tax at UK dividend tax rates. Dividends are paid to their recipients without tax deducted so it is up to them to declare them to HMRC.
Dividend Tax Allowance 2022-23
The dividend allowance for 2022-23 is £2,000, the same as the previous tax year. In the recent Autumn budget 2022 it was announced that the dividend allowance would be reduced in the coming years – it will be cut to £1,000 for 2023-24 and then to £500 for 2024-25.
The dividend tax allowance is in addition to the personal allowance, which can be used against dividend income unless it’s been used elsewhere.
What are the UK Dividend Tax Rates?
Once any allowances are used up individuals will start to pay income tax on dividend income at the dividend tax rates. The current rates are:
|Personal Allowance||£0 to £12,570||£0 to £12,570|
|Basic Rate Taxpayers (£12,571 to £50,270)||8.75%||7.5%|
|Higher Rate Taxpayers (£50,271 to £150,000)||33.75%||32.5%|
|Additional Rate Taxpayers (Over £150,000)||39.25%||38.1%|
Increases of 1.25% in dividend rates were announced as part of the Autumn Budget.
How Are Dividends Taxed?
Dividends are taxed depending on which income tax band an individual falls into after taking into account all their earnings.
Penny is a self-employed actor and has set up a Limited Company. During the tax year 2021/2022 she paid herself a salary of £12,570 and took a dividend of £20,000 from her Limited Company. Penny 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%|
How Do You Pay Tax on Dividends?
If you need to pay dividend tax, then the way you report it to HMRC depends on how much you receive each tax year.
Dividend Income Up to £10,000
If you earn less than the UK dividend allowance, currently £2,000 for 2022-23, then you may not need to tell HMRC about it or register for self assessment.
If you receive up to £10,000 in dividends and have a PAYE job, then you don’t need to register for self-assessment. Instead, you can call HMRC on 0300 200 3300 and ask them to adjust your tax code, so that any tax you owe is taken out of your payslip.
If you are not employed and earn more than the dividend allowance, you’ll need to fill in a tax return. You’ll need to register for self-assessment to do this by 5 October following the tax year you started receiving dividends or you went over the UK dividend allowance.
Dividend Income Over £10,000
If you earn more than £10,000 then you’ll need to fill in a tax return to declare your income and pay any tax you owe. Again, you’ll need to register for self-assessment by 5 October following the tax year you started receiving dividends or you went over the UK dividend allowance.
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.
Read this guide to download a copy of a Dividend Certificate Template to fill out and keep on file for your Limited Company.
Can A Sole Trader Pay Dividends?
A sole trader cannot pay a dividend because they do not own shares. Dividends are a payment to shareholders. Sole traders are taxed on their self-employment profits, regardless of how much they pay themselves.