A Guide to Understand How Dividends Are Taxed in UK

How Dividends Are Taxed in UK

Do you know that companies pay dividends to their shareholders (quarterly or annually) for their percentage in company shares as rewards whenever they make profits? Actually, many people just make investment in company shares to earn a regular income from dividends as these are mostly paid quarterly or annually. However, there are also some companies in the United Kingdom that pay dividends to their shareholders each month such as Agree Realty (ADC). In such a scenario, it makes sense to understand that how these dividends are taxed so that any unexpected tax bills can be avoided. So, if you are also a shareholder in a limited company that pays dividends, here is a guide that may help you.

Tax-Free Allowance

For the dividends, there is a tax-free allowance every year. It is £1,000 for the tax year 2023-24, which implies that you can receive income of up to £1,000 from dividends without paying any tax to the Government. Unfortunately, any dividends earned above this amount are subject to tax. Earlier, this tax-free allowance was £2,000 until 5 April 2023.

Tax Rate for Taxpayers

 If you are a basic rate taxpayer, you must pay tax on dividends above the £1,000 allowance at 8.75%. Similarly, if you are a taxpayer who falls in the higher tax band, you have to pay tax at a 33.75% rate, and if you fall in the top income tax rate, you will pay tax on your dividends at a 39.35% rate. 

To understand more about how dividends are taxed, here is an example. Suppose you earn £2,000 from dividends and £28,670 as a salary in the 2023 to 2024 tax year. So, your total income will be £30, 670 and you will have a taxable income of £29,670 as the tax-free allowance is £1,000 for dividends. So, all you need to pay will be £87.50 as your dividend tax. 

Some Exceptions

Remember, there is no need to go into the hassle of informing the HMRC if you earn £1,000 as dividends as this falls within the dividend tax allowance for 2023-24. Surprisingly, there is an exception! Tax on dividends earned from shares in an Individual Savings Accounts (ISA) is zero. Also, there is no need to make National Insurance Contributions on dividends.

In a nutshell, dividends are a steady income source for many UK investors. An understanding of how they are taxed can help you to avoid any unpleasant surprises from the HMRC. So, if you are still confused, hire an experienced UK-based accountant or tax advisor to get the required assistance.