Dividends - When to pay tax
Dividends are shares of profit paid out by limited companies. A company’s shareholders receive dividends when it makes a profit.
A limited company can only declare dividends if it makes enough profit after paying all its liabilities and expenses.
The amount of dividends relates to how many shares a shareholder owns. The dividend amount is declared per share, for example, 25p per share. If a shareholder owns 30 shares of a company, they can be allocated £7.50 in dividends.
When is tax due?
There are a few factors to consider when determining how much tax is due on dividends.
Individuals receive a £2,000 annual dividend allowance, applicable to the first £2,000 of taxable dividend income. Dividend income within the £2,000 allowance is taxed at a nil rate of 0%.
An individual receives the dividend allowance in addition to the personal tax-free allowance. For 2022/23 the personal allowance is £12,570.
The tax rate you pay on dividends, above £2,000, is relative to your income tax rate band.
Although dividend tax rates are lower than income tax rates, dividend tax rates have increased this year due to the health and social care levy.
Many directors of limited companies choose to receive payment as a dividend since the rates are lower than income tax rates.
Income Tax Rate Band | 2021/22 | 2022/23 |
Basic rate taxpayer | 7.5% | 8.75% |
Higher rate taxpayer | 32.5% | 33.75% |
Additional rate taxpayer | 38.1% | 39.35% |
Declaring tax to HMRC
If an individual’s dividend income is within the £2,000 tax-free allowance, HMRC do not need to be notified.
People who earn dividends between £2,000 and £10,000 can call HMRC to request a change to their PAYE tax code. Changing the tax code will allow for the correct payment of tax. To declare dividends, individuals can choose to file a self-assessment tax return instead.
Those who earn over £10,000 in dividends must file a self-assessment tax return. Individuals who have not registered for self-assessment must do so by 5th October, following the tax year of the dividend payment.
Other taxes
When dealing with shares, other taxes may be due. For example, if an individual sells shares, capital gains tax may be due on profits made.
Gains over the annual capital gains allowance will be taxed at a rate based on the individual’s income tax rate band. The capital gains tax annual allowance for 2022/23 is £12,300.
There may also be stamp taxes to pay when purchasing shares.
Tax advice
If you require advice on dividends or tax planning, our friendly team of experts are on hand to offer tailored advice to meet your needs.
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The information in this guide is intended as an informative piece and does not constitute tax advice for individual matters.
