Tax on dividends guide

Tax on dividends guide

If you’re curious about dividends, and what tax you may need to pay on them, here’s a helpful guide to help you get started.

What are dividends?

Dividends are payments you might receive if you own shares in a company. For example, as a shareholder of a limited company. They are normally paid annually, and come from the profits of the company.

Paying out dividends

If you’re paying dividends from your company, you typically pay all your shareholders. Here’s the process for paying out dividends:

  • Hold a directors’ meeting to ‘declare’ the dividend, with minutes kept.
  • If you’re the only director, you still need to hold a meeting and keep minutes!
  • Complete dividend paperwork
  • Write a dividend voucher for each payment

Here’s what you need to include on your dividend voucher:

  • Date
  • Company name
  • Names of the shareholders who are paid a dividend
  • Dividend amount

Each recipient needs a copy of the voucher, and you also need to keep a copy for the company’s records.

Tax on dividends

Companies don’t pay tax on dividends, the shareholders do. As a shareholder, you can earn some dividends without paying tax. This may be because:

  • The amount is within your Personal Allowance
  • You receive a dividend allowance each year, so you pay tax on whatever amount is above this
  • If your shares are in an ISA, you pay no tax

You can’t count dividends as business costs when you calculate your Corporation Tax.

Dividend allowance

The dividend allowance for the current tax year (6 April 2020 to 5 April 2021) is £2,000.

Dividend tax rates

The amount of tax you pay on dividends depends on your Income Tax band. Your tax band will be the total of your dividend income and any other income.

Tax band Tax rate on dividends (over the allowance)
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

 

It is possible to pay tax at more than one rate. This would include:

  • Income tax on your normal income
  • Dividend tax on your dividends
  • No tax on income and dividends that falls within your allowances

How to pay dividend tax

The way you pay dividend tax depends on the amount of income you receive from your dividends each tax year.

  • Within your dividend allowance: You do not need to tell HMRC.
  • Up to £10,000: Tell HMRC you received this income by contacting them. You may need to change your tax code. If you fill in a Self Assessment tax return, you will need to include your dividends.
  • Over £10,000: You will need to fill in a Self Assessment tax return. You will need to register by 5 October of the following tax year if you haven’t already!

Online accounting software to help prepare your Self Assessment tax return

An online accounting software is a great way to prepare for your Self Assessment tax return. Bokio is a free accounting software ideal for limited companies. With Bokio, you can do your bookkeeping, invoicing and expenses all in one place. So, you’ll have everything you need to help complete your tax return.