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How much is the dividend tax free allowance?
Dividends are payments by companies to their shareholders on a regular basis (usually annually or half-yearly) from its profits. While during the pandemic dividends all but dried up with many companies struggling to make a profit, they are now back offering value to investors.
Is there a tax free allowance for dividends in the UK?
In the UK, HMRC allows individuals to receive a certain amount of dividend income before they start paying tax, known as the dividend tax free allowance.
This allowance was first introduced on 6 April 2016 to all UK residents, replacing the dividend tax credit at that time.
Although in the UK we can utilise the dividend allowance, recently changes were announced that will reduce the amount at which you can earn before paying tax meaning more people will have to start paying tax on their dividend income in the new tax year.
What is tax free dividend allowance?
For the 2022/23 tax year, the dividend tax free allowance is £2,000. This means that you can receive income of up to £2,000 from shares and some equity-based collective investment funds without paying any tax.
Dividends that arise within ISA and pension wrappers are exempt from dividend tax due to the favourable tax-free growth nature of these investments.
Once the amount of dividend income an individual receives breaches the dividend allowance, the level of tax you pay on this income depends on what level of total income you receive in any given tax year.
| Tax Band | Income Level | Income Tax Bracket | Dividend Tax Bracket |
|---|---|---|---|
| Basic Rate | £0-37,700 | 20% | 8.75% |
| Higher Rate | £37,701-150,000 | 40% | 33.75% |
| Additional Rate | Over £150,000 | 45% | 39.35% |
The above table shows the level of tax you will pay if you receive more than £2,000 worth of dividend income in the current tax year. If your total income for the year is less than the Personal Allowance, which sits at £12,570 in the current tax year, you will also not pay tax on your dividend income.
As per the table above, dividend tax rates are less than income tax rates, making dividends a more favourable form of income. Individuals who own their own limited company can take dividends from the profits of their company instead of a salary in order to decrease their tax liability for a given tax year.
Changes coming in from 6 April 2023As mentioned above, the current Chancellor of the Exchequer, Jeremy Hunt, announced in his latest Autumn Statement (on 17th November 2022) that he will be slashing this allowance to £1,000 in 2023/24 and £500 in 2024/25.
In addition to this, Hunt has announced that the income level at which individuals will pay additional rate tax is decreasing to £125,140 – which means that more people will fall into this top banding and therefore will also fall into the 39.35% additional rate of dividend tax.
Can I transfer tax free allowance to share dividend allowance?
Although it is not possible to transfer your dividend allowance to your spouse, like it is with part of the Personal Allowance, transferring dividends to your spouse is an effective way to mitigate dividend tax if one member of the couple falls into a lower tax bracket than the other. As assets can be passed between spouses free of inheritance tax implications, assigning shares to the lower earner means that any dividend income they receive over the dividend allowance will be taxed in accordance with their relevant, lower rate of dividend tax.
Please keep in mind this is a complex area of taxation and such work should be undertaken with help of your accountant or financial adviser.
How do I pay dividend tax?
Unlike a salary, dividends are not taxed at source. If you earn over the dividend allowance of £2,000, but less than £10,000 in the current tax year, you must contact HMRC. HMRC will give you the option of either adjusting your tax code to pay your dividend tax liability or completing a self-assessment tax return.
If you earn over £10,000 of dividend income in the current tax year, your only option for paying your dividend tax bill is by completing a self-assessment tax return.
Self-assessment tax returns must be completed for the previous tax year by 31st October if choosing to fill in a paper form or 31st January if you opt of an online form. For example, you must complete your online tax return for the 2021/22 tax year by 31st January 2023.
How we can help
Whether you are a business owner who would like to efficiently draw an income from your business, or you are receiving income from your investments, we can build an effective, tax efficient income strategy that suits you and your family's needs. We make it a priority to stay on top of legislative changes to taxes applicable and work with a number of client accountants to ensure we have the most up to date tax information available for each client.
If you’d like to learn more about how we can help you, why not get in touch for free initial review with one of our expert advisers.
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Note: The FCA does not regulate estate or tax planning or cash-flow modelling. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
