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Quickly calculate the tax you need to pay on dividends you received from investments. And if you're a company director, see the best way to pay yourself (dividends or salary).
Your situation
Tax and profit
Your dividend profits
£3,000
Dividend tax to pay
£75
£2,000 tax-free dividend allowance
?
Profit after tax
£2,925
You can either call HMRC on 0300 200 3300 to take this tax from your salary or pension, or include it on your Self Assessment tax return.
How your dividend tax is calculated
Tax on dividends is calculated pretty much the same way as tax on any other income.
The biggest difference is the tax rates – instead of the usual 20%, 40%, 45% (depending on your tax band), you’ll be taxed at 7.5%, 32.5%, and 38.1%.
The numbers look strange but the reason is simple: the company paying you those dividends already paid corporate tax, so you’re paying the difference.
This is mostly relevant if you own your company and you’re trying to decide the best way to pay yourself: dividends or salary. Keep in mind that if you pay from your salary, you also need to pay National Insurance.
In your case you earned £3,000 in dividends and £29,000 in other income (this can be salary, rent, etc.).
Dividend Tax
You don’t pay any dividend tax on the first £2,000 you make in dividends.
You pay 7.5% on the next £1,000
Call HMRC on 0300 200 3300 so they can change your tax code – you’ll pay the dividend tax through your salary or pension.
If you normally file a tax return, you can also pay dividend tax through it.
What are dividends?
When you buy stocks in a business, you can sometimes get paid in dividends. A dividend is a payment a limited company makes to share their profits with its stockholders. But not all stocks pay you dividends. Only dividend stocks will pay dividends – which probably seems obvious but it’s an easy mistake to make when you’re just starting out as an investor!
Take a look at the five types of dividend that you can get:
- Cash dividends (these are the most common type)
- Stock dividends
- Dividend Reinvestment Programmes
- Special Dividends
- Preferred dividends
What is dividend income?
Dividend income is similar to savings interest paid out by a bank. When you buy a limited company’s stocks, they can reward you with dividends when they make a profit.
What are the tax benefits?
Dividends can be a very tax-efficient investment. By this, we mean you can earn more money because you owe less tax. Be aware though that being tax-efficient is not the same as tax evasion. Tax evasion is illegally avoiding paying tax that you owe. Tax efficiency is paying the lowest amount of tax on your profits by taking advantage of tax-free allowances and low-tax financial tools.
As you can see from the calculations above, the rate at which you’re taxed on dividends is lower than the standard income tax rates. You also don’t have to pay National Insurance on profits made through dividends. This is because the business you’ve invested in has already paid Corporation Tax on their profits, so the dividend tax rates are the difference between Income Tax and Corporation Tax rates.
As a result of the better rates, you can earn more money on the same investment through the lower tax liability.
What’s the dividend allowance?
You can earn up to £1,000 in dividends before you have to pay tax on them. Anything above £1,000 and you have to declare your earnings and file a tax return.
I’m an additional rate taxpayer – what do I pay?
If you earn over £125,140 or more across all sources of income, you pay 39.35% tax on the dividends you earn over £1,000 per tax year. You should pay this via a Self Assessment by 31st January following the end of the tax year you earned them.
Not done a Self Assessment tax return before? Here’s a quick video to explain what it’s all about.
Looking for tax help?
Or see our Guides, Calculators or Taxopedia
If you like our dividend tax calculator 👇
Now that you know all about the tax on dividends income, you must be hungry to learn more! (And who isn’t when it comes to dividend tax, right?) These are our most read articles about the tax you pay on dividends and investments for your inspection. Made more than £12,300 in profit from investment this tax year? Try our Capital Gains Tax calculator to see what you might owe in CGT tax.
- How to pay tax on dividends
- How much is tax on investment income?
- Earning £100k+ and on the wrong tax code?
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