What is a Dividend?
A dividend is paid by a company to it’s shareholders when sharing company earnings after tax.
The dividend is established by a company’s board of directors and paid in cash or in additional stock which is known as reinvestment.
A dividend can be used by an investor or a company director in different ways.
If you are a director of a limited company your dividend can often form part of your income and can help in making you and your company as tax efficient as possible.
If you are an investor a dividend and your dividend yield are important parts of your investment strategy.
In both cases understanding the tax implications of your dividend is important.
How are dividends taxed?
Dividends are taxed in a similar way to other types of income but with varying rates of tax. Your tax free personal allowance can be set against your dividend income.
You also receive a dividend allowance per tax year which means you only pay income tax on dividend income above the dividend allowance.
Dividends received from shares in a tax free ISA are not taxable.
For self assessment taxpayers you will need to include your dividends in the relevant section of your self assessment tax return.
What is the dividend allowance?
The dividend allowance is given in each tax year and allows you to only pay tax on dividend income over the dividend allowance. Your dividend allowance is in addition to your tax free personal allowance.
A dividend allowance can only be used in the tax year it is allocated and is not transferrable to a future tax year.
Dividend allowance per tax year
Tax year
6 April 2024 to 5 April 2025: £500 dividend allowance.
6 April 2023 to 5 April 2024: £1,000 dividend allowance.
6 April 2022 to 5 April 2023: £2,000 dividend allowance.
6 April 2021 to 5 April 2022: £2,000 dividend allowance.
How much tax do I pay on dividends?
Income tax is payable at increasing levels depending on the level of your dividend income.
The rate(s) at which you pay income tax determines the dividend tax rate.
For example if you pay tax at the basic rate of tax your dividends will be taxed at 8.75% instead of 33.75% which is the rate for higher rate taxpayers.
You need to add your total dividend income to your other income to give you a total income figure which can mean you could pay dividend tax at more than one rate of tax.
Dividend tax rate per tax band
Basic rate tax: 8.75% dividend tax rate.
Higher rate tax: 33.75% dividend tax rate.
Additional rate tax: 39.35% dividend tax rate.
What is a dividend yield?
Dividend yield is shown as a percentage and is used to show how much a company pays out in dividends per share relative to its share price.
A dividend yield is worked out by dividing the annual dividends per share by the price per share.
The dividend yield metric is commonly used by investors when making decisions on buying and selling shares.
