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Tax on dividendsWhat are dividends?

Dividends are a payment or’ income’ paid to you (a company shareholder) on shares that you own in a company.

If you run a limited company, you may want to consider using dividends as a way of extracting profit from the family business, in a tax-efficient way.

How much tax do you pay on dividends?

In the 2020/21 and 2019/20 tax years, you can earn up to £2,000 of income via dividends without paying any tax. This is limit is called your Dividend Allowance.

You also do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).

You get a dividend income allowance each year.

You do not pay tax on dividends from shares in an ISA (Individual Savings Account).

How much tax you pay on dividends depends on your Income Tax band:

Tax bandTax rate on dividends
Basic rate tax-payers7.5%
Higher rate tax-payers32.5%
Additional rate tax-payers38.1%

To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate.

Example:

You get £3,000 in dividends and earn £29,500 in wages in the tax year to 5 April 2021.

This gives you a total income of £32,500.

You have a Personal Allowance of £12,500. Take this off your total income to leave a taxable income of £20,000.

This is in the basic rate tax band, so you would pay:

Because of the dividend allowance, you would pay no tax on £2,000 of dividends

You then have £1,000 left of dividends, which you pay 7.5% tax

You then have £17,000 left over from your wage, which you would pay 20% tax on

How do you pay your tax on dividends?

If you do need to pay tax on your dividends, you will need to claim on and pay through your annual Self-Assessment Tax Return.

How and when you pay depends on the amount of dividend income you got in the tax year. It may be one payment for 31 January following the end of the tax year, a payment on 31 January and 31 July or collected via your tax code. You can discuss this with HMRC or your usual Ellacotts contact for advice.

The Limited Company is not required to pay any tax on the dividends it pays to shareholders.

Do you need help and advice on Dividends?

Speak to us about dividends, whether you are thinking of paying directors by dividends, or have them yourself. We can ensure that you are in the best tax position to make sure you are paying.

Get in touch with Derek Boughton on dboughton@ellacotts.co.uk or 01295 250401 or contact us here. We would be delighted to help you with your tax position.