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Guide To Paying Tax On Dividends

Dividends are a way for companies to repay their shareholders financially. Under the existing tax legislation, certain dividends may be taxed at a lower rate than other dividends. You may be able to pay less income tax on certain dividends due to this. in this article, we will walk you through all you need to know about paying tax on dividends. 

What is a dividend?

Limited liability companies pay out dividends to their shareholders quarterly or yearly. You’ll be paid depending on your company’s quarterly profit and how much stock you possess. After all, expenditures have been accounted for, what remains in your company is the basis for dividends, not revenue. If your company doesn’t have enough profit after tax to fund the dividend, it is unlawful to pay a dividend. It is also vital to note that dividends cannot be included as a business cost for Corporation Tax purposes.

What is your company’s dividend distribution process?

To “declare” a dividend, a board of directors meeting is required before making the payment. Minutes and a record of the meeting are necessary. Even if you’re the single director of a limited company, you’ll still need to complete the necessary paperwork to comply. 


You must provide a dividend voucher for each dividend payment your company makes, which must include the following information:


  • Date the dividend is paid
  • The company name
  • Name of shareholders who will receive dividends.
  • Amount of the dividend.
  • The voucher should be given to all receivers of the dividend money, and your company should keep a copy.


In most cases, dividends should be dispersed based on the percentage of a company’s shares each shareholder owns. This means that if you hold half of the company’s shares, you should receive half of the dividends.

What is dividend tax? 

Shareholders can make money in two ways: by selling their shares when their value rises or by receiving dividends when the company decides to allocate its profits to shareholders. Dividends are an excellent option to earn a steady income stream from your investments. However, like with any source of income, you may be subject to taxation. However, even though dividend taxes are lower than income taxes, the government announced in September 2021 that dividend tax rates would rise by 1.25 percentage points starting April 6, 2022.


Dividends collected as income in the 2022-23 tax year will be subject to the new rates. Your dividend tax bill will increase starting April 6, 2022, if you pay tax on dividend income via your tax code. If you pay tax via a self-assessment tax return, however, you’ll have until January 31, 2024, to pay the higher dividend tax rates on your dividend income for the years 2022-23. Tax-free dividend allowances allow you to earn more money from your investments before you have to pay taxes.

What does the annual tax-free Dividend Allowance mean

In the 2021/22 and 2020/21 tax years, you can earn up to £2,000 in dividends before paying any Income Tax on them; this amount is in addition to your Personal Tax-Free Allowance of £12,570 in the 2021/22 tax year and £12,500 in the 2020/21 tax year.


The annual tax-free allowance Dividend Allowance is solely applicable to dividend income. It was implemented in 2016 to replace the previous system of dividend tax credits. It aims to eliminate a layer of double taxation by allowing corporations to distribute dividends from taxed profits. The tax rates on dividends are likewise lower than the personal tax rates. As a result, limited company directors frequently pay themselves tax-efficiently through a combination of salary and dividends.


Dividend tax rates for basic, higher, and additional rate taxpayers in 2021-22, as well as changes in those rates in 2022-23, are shown in the table below.


Income tax band Dividend tax rate 2021-22 Dividend tax rate 2022-23
Basic-rate 7.5% 8.75%
Higher-rate 32.5% 33.75%
Additional-rate 38.1% 39.35%

What are the tax rates on my dividends?

The basic rule is that your tax rate is based on the amount of income and capital gains you’ve earned in a particular year.


In the 2021-22 tax year In the 2020-21 tax year
If you make less than £12,570, you won’t have to pay a penny in taxes. As long as your income was less than £12,500, you won’t pay any taxes.
Income between £12,570 and £50,270 is in the basic-rate tax bracket. Income between £12,500 and £50,000 was in the basic-rate tax bracket
Income between £50,270 and £150,000 is in the higher-rate tax bracket Income between £50,000 and £150,000 was in the higher-rate tax bracket
Income above £150,000 is in the additional-rate tax bracket. Income above £150,000 was in the additional-rate tax bracket.


Do you need to pay dividend tax equity investment funds? 


Dividend taxes are levied on all income, not just shares dividends. Also, any profits you get from funds that invest on your behalf will be subject to this tax. In other words, if you invest in open-ended investment companies or investment trusts, you must pay dividend tax. However, if you invest in bond funds that buy debt from companies and governments, you will be taxed on the interest.


Bond fund interest payments must be reported on tax returns by higher and additional rate taxpayers. It is now possible to get your money before taxes have been deducted, as of April 2017. There is no capital gains tax on dividends, interest, or capital gains from assets. These taxes solely apply to your income from those investments.

How do I pay my dividend tax bill?  

You don’t have to do anything if your dividends total up to £2,000 or less. Your dividends are tax-free, so you don’t have to tell HMRC. The HMRC will need to know whether you make between £2,000 and £10,000. Taxes may be paid by submitting a self-assessment tax return or having HMRC change your tax code to deduct the tax from your salary or pension. If your dividend income exceeds £10,000, you’ll be required to file a tax return.

If you need further clarification, please contact J27 Accountants for anything you need.

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