The dividend tax is one of those taxes you hear about once every few years, but it’s actually pretty important. If you’re wondering what the difference is between paying income tax and paying corporate income tax, here’s a quick primer.
Income tax vs. Corporate tax
Income tax refers to how much money you make compared to how much you spend. In other words, your gross income minus deductions equals taxable income.
What is dividend tax?
The dividend tax is the amount of income tax you will owe after you receive dividends. If you are taxed at 20%, then you will owe 40% of the earnings minus deductions. You must calculate your dividend tax liability based on your marginal tax rate. This is because the tax is calculated on the total taxable income, including capital gains and dividends.
If you do not receive dividends, you will pay no tax on your profits. However, you still have to report your profit on your personal tax return.
You can deduct some expenses from your taxes. These include mortgage interest, property taxes, charitable donations, medical costs, and other miscellaneous items.
The UK government says it wants to make sure people don’t miss out on paying income tax because they’re unaware of how much they’ll owe.
How much dividend tax do I owe in 2022-23?
There are two main ways to put your cash to work in the UK: via an Individual Savings Account (ISA) or directly into a company, such as a stockbrokerage firm or mutual fund. But what happens if you decide you no longer want to hold shares in the company where you invested? Or maybe you just want to diversify your investments. Either way, it’s important to understand how taxation works in the UK – and how it affects your investment returns.
Then we take a look at the different types of taxpayers in the UK and talk about how each one is taxed on their dividend income. Finally, we give you our recommendations for high yielding dividend paying stocks and discuss the best times to buy them.
Investors looking to generate positive returns in the long term have many choices. One option is to invest in shares. If you believe that shares will deliver strong growth, you might consider buying individual shares directly from companies. This method is known as direct ownership.
Alternatively, you could choose to invest in a managed fund that owns shares. In exchange for charging fees, fund managers make decisions for you. So far so good, but once you start receiving dividends, the rules change. You will have to declare and pay tax on those dividends. And if you die, your beneficiaries usually won’t receive any capital gains treatment.
To avoid having to pay tax on their distributions, many institutional investors simply don’t distribute enough to exceed £150,000 per person and per year. To keep up to date with the latest HMRC guidance, investors must review their holdings every six months.
When is dividend tax payable?
The government introduced a dividend tax in April 2017, meaning anyone earning dividends from investments is now liable for paying tax on those earnings. This applies to both individuals and businesses.
In addition to the basic rate of 20%, there are three additional rates of 30% and 40%. If you’re self-employed, you’ll pay the same percentage as your employer. You can claim a deduction against your gross dividend income, however, reducing the amount of tax you owe.
You can’t avoid paying tax altogether, though. If you’ve already paid tax on your previous investment gains, you won’t be able to reclaim it. However, you do still benefit from capital allowances. These mean that you don’t have to pay tax on up to £1m worth of investment property each year.
There’s a £2,001 limit on the total value of shares you can put into a single Individual Savings Account (ISA).
What dividend tax rates will I be subject to?
Income earned through dividends is taxed at different rates depending where you live. If you earn income from dividends paid by UK companies, you’ll pay 20% corporation tax on it. This is known as basic rate tax.
If you earn income from dividends received from overseas companies, you’ll pay either corporation tax or capital gains tax. Corporation tax applies to dividends received from companies based outside the UK, while capital gains tax applies to dividends received worldwide.
You can use our dividend tax calculators to help work out what tax you will pay on each type of dividend.
In the 2022-23 tax year year
The UK government announced today that it plans to raise taxes on people earning over £150,000 per annum. This announcement comes just weeks after Chancellor Philip Hammond announced his budget plan for the upcoming fiscal year.
According to the chancellor, the move is necessary because of the growing gap between rich and poor in the UK. He says that the current system is unfair and needs to change.
However, critics say that the move could hurt small businesses and harm the economy. They argue that raising taxes on high earners will affect the number of jobs available for lower paid workers.
While there are many questions about how the changes will impact individuals, one thing is clear: the UK government will start taxing people earning over £150k starting next April.
How do I calculate my dividend tax liability?
If you earned more than £2,000 ($3,100) in dividends during 2018, it’s worth filling out a tax return. Otherwise, you don’t owe any taxes. Here’s how to calculate your dividend tax bill.
The first thing to know is that your earnings from employment and pension contribution counts towards your taxable income first. This includes wages, tips, bonuses, overtime pay, employer contributions to pensions, and employer contributions to health insurance.
Then comes savings income, which include interest, dividends, rental incomes, etc. These form part of your savings account.
Finally, dividends count towards your total taxable income last. You must report all dividends received throughout the year, even if you didn’t spend them.
If you earn less than £2000 in dividend income, there’s nothing to worry about. If you earn between £2000 and £10000 in dividends, you should file a tax return.
If you earn more than £10000 in dividends, it’s likely that HMRC will want to talk to you. They’ll ask what type of investment fund you hold shares in, whether you receive regular payments, and how much you earn each month.
You’ll need to keep records of everything you’ve earned and spent, including your salary, pension contributions, rent, mortgage repayments, utility bills, food costs, travel expenses, and any other money you’ve spent.
When will I be subject to the increased dividend tax rates?
The government plans to raise the dividend tax rates for self-assessment taxpayers from 6 April 2022. From next year, those earning income above £150,000 ($200,000) per annum will face higher rates of 20% and 40%.
Self-assessed taxpayers have until 31 January 2023 before having to pay the higher rates. Those who paid dividends through a tax code will now have to pay the higher taxes starting in 2022.
Do I pay tax on dividends from equity funds?
If you are investing money into an Australian equities fund, it pays to know whether you are subject to capital gains tax or dividend taxes. If you invest directly into an individual stock, you won’t pay either tax. But if you invest via a managed portfolio, you could end up paying both types of tax. This article explains what each type of tax is and how they apply to investors.
Do I owe capital gains tax on my stock gains?
Capital gains tax applies to share sale profits. If you sell shares worth less than £12,300, you won’t owe any tax. This includes dividends received from those shares. However, if you sell shares worth more than £12,300 you must declare the profit and pay income tax on it.
Gains above the threshold aren’t taxable. You don’t pay tax on gains over the threshold.
Basicrate taxpayers don’t pay capital gains tax on gains up to £12,300. They do however pay tax on gains over that amount.
Higher-rate taxpayers pay tax in three stages. First, they pay tax on the basic rate band of 20% on gains up to £50,000. Second, they pay tax on 40% of the excess over £50,000. Third, they pay tax on 50% of the excess over that amount.
Additional-rate taxpayers pay tax at 45%.
Frequently Asked Questions
How am I taxed on my savings and dividend income?
Savings and dividend income are often lumped together under the term ‘investment income’. But there are actually three types of investment income – capital gains, rental income and dividends. You don’t have to pay tax on most of it, however, because it doesn’t count as ‘income’. Instead, it counts as either a deduction or an exemption.
You generally have to pay tax on any increase in the value of shares or property that you sell. If you buy something for £100 and sell it for £150, you’ll owe tax on the extra £50. Capital gains are taxed at 20% for basic rate taxpayers and 40% for higher rate ones.
Most people think that renting out property is taxable. In fact, though, it isn’t. Rental income doesn’t count towards your personal allowance, so you won’t normally have to pay tax on it. However, some landlords choose to charge rent based on how much they earn rather than how much they spend. If you earn less than £10,000 per year, you might still have to pay tax on your rental income.
If you invest in a company, you can usually claim a tax rebate on the dividends you receive. Dividend income is treated differently depending on whether you are a corporation or an individual. Corporations can deduct up to £5,000 worth of dividends each year against their profits. Individuals can deduct up to £1,000 per year.
How am I taxed on my bank and building society interest?
Interest earned on your money held in a UK bank account or building society accounts is subject to income tax. This applies whether you are earning interest from a fixed deposit, current account balance or investment portfolio. If you earn less than £10,000 in interest each year from one source, it could be worth paying HMRC a visit.