How are dividends taxed?

Dividends received from shares held in UK companies form part of a tax-payers self-assessment. The payments are made by the paying company without any deduction of tax and therefore the amount received is the sum that needs to be declared.

Dividends are paid out of the company’s retained profits – these are profits after any corporation tax has been paid – once these reserves are exhausted, it is illegal to declare or pay any further dividends.

Tax payable on dividends received by shareholders is not payable at income rates (20%, 40% or 45%), but as hybrid rates. The rates for 2018-19 are:

  • The first £2,000 of dividends received – no tax is payable,
  • Dividends that form part of a tax payer’s basic rate band for income tax purposes, are taxed at 7.5%,
  • Dividends that form part of a tax payer’s higher rate band for income tax purposes, are taxed at 32.5%, and
  • Dividends that form part of a tax payer’s additional rate band for income tax purposes, are taxed at 38.1%.

It is possible that some of your dividends may form part of your basic rate and part of your higher rate, or additional rate tax bands, in which case any tax payable will be calculated using a combination of the 7.5%, 32.5% and 38.1% rates.

If the amount of the dividends you receive in the tax year 2018-19 are under £10,000 – but above £2,000 – and you do not submit a self-assessment tax return, you will need to advise HMRC, who will adjust your code number, and collect any tax due via PAYE.

If the dividends are over £10,000, they must be declared on a self-assessment tax return.

If the total dividends you receive in this tax year are under the £2,000 tax-free allowance, there is no need to inform HMRC.

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