A Simple Guide to Tax on Dividends in the UK

September 18, 2024

Dividends are payments made by companies to shareholders from their profits. The dividend allowance is the amount of dividend income you can receive each tax year before having to pay tax on it. This allowance was introduced to encourage small-scale investors, but it has been gradually reduced over the years. For the 2024/25 tax year, the allowance stands at £500. Here’s a breakdown of how dividends are taxed:

1. Dividend Allowance

For the 2024/25 tax year, the dividend allowance is £500. This means the first £500 of your dividend income is tax-free.

2. Dividend Tax Rates

After your allowance is used, any remaining dividend income is taxed at the following rates, based on your Income Tax Band:

Basic Rate: 8.75% (for total income between £12,570 and £50,270)
Higher Rate: 33.75% (for total income from £50,271 to £125,140)
Additional Rate: 39.35% (for total income above £125,140)

3. How to Pay Dividend Tax

If your dividend income exceeds the £500 allowance, you must report it to HMRC.
For dividends between £500 and £10,000, you can declare them via your self-assessment tax return or ask HMRC to adjust your tax code.
For dividends over £10,000, a self-assessment tax return is mandatory.

4. How Dividend Tax is Calculated

Your dividend tax is calculated by adding your dividend income to any other earnings, such as wages or rental income. You’ll only pay tax on the portion that pushes you over your personal tax thresholds.

5. Dividends Within an ISA

Dividends earned from Individual Savings Accounts (ISAs) are tax-free. This makes ISAs a great option to invest and avoid dividend taxes.

6. Tax Planning

Timing dividends wisely can reduce your tax liability.
Keeping your total income within a lower tax band or using an ISA for investments can help minimise the taxes on your dividends.

Do I pay tax on UK dividends if I am a non-resident?

As a non-resident of the UK, you generally do not pay UK tax on dividend income from UK companies. However, the following points apply:

1. Non-residents and UK Dividend Income:

As a non-resident, you’re not required to pay UK income tax on dividends, even if they are from UK-based companies.
UK companies pay dividends after they have been taxed at the corporate level, meaning the dividends you receive are from post-tax profits.

2. Home Country Taxation:

You may still be required to pay tax on your UK dividends in the country where you are a tax resident, depending on the local tax laws.
Many countries have double taxation agreements with the UK, which means you may be able to avoid being taxed twice on the same income.

3. Double Taxation Treaties:

If there is a double taxation agreement between the UK and your country of residence, this may reduce or eliminate the UK tax on dividends. You’ll need to check the specific agreement.

It’s always best to consult with a tax adviser in your country of residence to ensure you’re meeting the necessary obligations.

Take professional advice

Dealing with dividend taxes can be complex, but you don’t have to figure it out alone. Whether you need guidance on your tax obligations, strategies to optimize your dividend income, or support with your self-assessment, Pro Taxman is ready to assist.