Dividends are paid to shareholders of companies out of the annual profits those companies make.
Correct at the time of posting, March 1, 2023
Companies don’t have to declare a dividend, but generally choose to do so, particularly if they want to attract new investors or provide a return to the owners.
Whether you are an investor, with directly held shares in a company, or an officer or employee who has been awarded shares in the company you work at, the rules on dividend tax and tax allowances remains the same and is determined by a number of factors:
Your overall taxable income
The amount you are paid in dividends
Your tax Band
Dividend payments are taxable, but there is an annual allowance and specific rates of tax apply depending on what tax Band you are in.
For instance: the current annual allowance, for 2022/23, is £2,000, as it has been for a number of years. This reduces to £1,000 for Tax Year 2023/24 and again to £500 for 2024/25. This allowance is in addition to the allowance on Income tax, of £12,570 and you can use both.
Tax on Dividends is 8.75% for Basic Rate tax payers, 33.75% for Higher Rate payers, and 39.35% for those falling into the Additional Rate bracket.
The key thing is to make sure that you are taking full advantage of what allowances there are available to you each year, as they can’t usually be carried forward.
There are tax planning opportunities to consider, such as including other family members in the ownership of your company to make use of available lower rate tax bands and therefore minimise the overall tax rate paid on dividends within the family.
At Dominic Hill we have experts in tax and tax allowances who can advise you on what your options are, depending on your personal circumstances and your income.