How are UK dividends taxed?
Dividend rates are based on your income tax rate, for the coming 22/23 tax year, these will be:
|Income Tax Band
||Dividend tax rate
||Income tax rate
There are a couple of things to note:
- There is also a dividend allowance, and you only pay dividends of amounts over that. For the 22/23 tax year this will be £2000. If you want to take a wider look at the 22/23 tax year, we’ve got a breakdown of that here.
- Shares you have in ISAs don’t count towards the total figure you have for the year.
- There is no ‘married couple’ allowance for dividend allowances, and you can’t transfer the allowance.
- Selling the share is not part of the dividend tax system, and instead falls into capital gains tax. You can transfer the shares to your married or civil partner without paying any capital gains tax to ensure both of your allowances are used effectively.
- You may have to pay tax on income you get from dividends which are in funds that invest in shares on your behalf. With mutual funds like investment trusts, unit trusts and open-ended investment companies (Oeics), depending on the assets the trusts hold, taxes will vary.
- Bond funds are different and income from these will be taxed as savings
We’ve got a guide on investment planning that could help you
How can I calculate my dividend taxes?
The first thing to know is that your taxes are ‘stacked’. Your income from work and pensions and property is placed first, then your capital gains, then savings income and then lastly your dividend income.
This means that dividend income, rather than salary income, will be taxed at the higher rates if you straddle two bands. As tax on dividends is lower than income tax at the same band, that can sometimes allow you to be more tax-efficient.
A hypothetical example to illustrate this:
If someone had a salary of £45,000 and an additional £9,000 was paid from dividends, your calculations would look like this:
Employment income, counted first,
- Up to £12,570 personal allowance: £0
- The next £32,430 at the basic rate of 20%: £6,486
- £35,120 taxed under the 13.25% class 1 NIC: £4,653.40
Dividend income, counted last,
- £2000 tax free dividend allowance
- £3,270 left of your basic rate income band at the 8.75% dividend rate: £286.13
- £3,730 of dividend is ‘pushed into the higher rate of 33.75%: £1,258.88
Giving a total tax bill of £5,912.28
Of course, your own personal situation may be full of factors that will influence your tax bill and so it’s important to be totally clear on the whole picture of your finances. We’ve got a tax guide that you may find helpful.