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UK Dividend Tax Rates Explained

UK Dividend Tax Rates Explained

As a potential business owner, you may already be envisioning running a successful company from your registered office address with healthy dividends to boot. However, it’s vital that you understand the all-important dividend tax rates in the UK before you embark on your entrepreneurship. And to help you recognise the various tax implications for your company’s dividends, we’ve outlined the definition of dividends (to help you refresh your dividend knowledge) along with a clear explanation of dividend tax rates in the UK.

The Definition of Dividends?

Dividends are simply the payments derived from a company’s profits, which are then subsequently paid to the company’s shareholders (find out more about how to change shareholders at Companies House). Dividends are taken from the post-tax profit, including the surplus figure that remains once the company has paid its taxes, business expenses, and liabilities.

What Are the Dividend Tax Rates in the UK?

The dividend tax rates in the UK that a shareholder must pay is dependent on the Income Tax band that a shareholder is in.

As for the years 2018/19 and 2019/20, dividend tax rates in the UK and allowance are the same for this year (2020/21). This essentially means that you will not pay any tax on the initial £2,000 of dividend income, however, anything exceeding this tax-free dividend allowance is subject to the following dividend tax rates in the UK:

INCOME TAX BANDDIVIDEND TAX RATE
Personal Allowance (up to £12,500)  0%
Basic rate (£12,501 – £50,000)  7.5%
Higher rate (£50,001 – £150,000)  32.5%
Additional rate (over £150,000)  38.1%

In order to determine the amount of tax that is required to be paid on dividends, you will need to add your total income (dividend income + director’s salary + any other taxable income) and then calculate which Income Tax band you fall in to, and subsequently which dividend tax rates apply to you.

You may end up paying no Income Tax or Dividend Tax if the total of your personal income is within your tax-free Personal Allowance and Dividend Allowance. Conversely, you might have to pay tax at more than just one rate if your total income exceeds the basic Income Tax band.

Dividend Payments That Are Tax-Efficient

If you’re a director and shareholder of a UK limited company, the amount of payable tax on dividends is an important factor to consider when assessing how to pay yourself via your company. For instance, is it more beneficial to receive a director’s salary, dividend, or a combination of both?

Considering that dividend tax rates are far lower than Income Tax rates (20% basic rate; 40% higher rate; 45% additional rate), it’s likely you will reap the benefits if you take a small director’s salary (e.g. below your tax-free Personal Allowance of £12,500) and then top up your income with conventional dividend payments. This will help you minimise your National Insurance Contributions and subsequently pay less tax on your income.

How you choose to pay yourself through your company is a vital decision that will form part of a wider tax-planning strategy. Therefore, it is advisable to appoint an experienced accountant who can offer bespoke professional advice, handle your business and personal finances, and consequently help you decide what is the most tax-efficient manner in which to run your company and eventually make a self-payment.

How Do You Pay Dividend Tax Rates in the UK?

The way you pay dividend tax is dependent on the amount of dividend income received in the tax year. If your yearly dividend income is £10,000 or below then you have to do to the following:

  • Contact the HMRC Income Tax helpline
  • Make a request to HMRC to change your tax code and deduct the dividend tax straight from your wages or pension
  • Include your dividend income on your Self Assessment tax return

Note: You needn’t inform HMRC if your dividend income remains within your £2,000 dividend allowance.

An annual dividend income that exceeds £10,000 has to be reported to HMRC on a Self Assessment tax return. If you already have Self-Assessment registration, simply include your dividend income in the corresponding section of your tax return.

However, if sending a tax return is not your familiar practice, you must register for Self Assessment by 5th October after the end of the tax year in which you received the dividend income. Consequently, your dividend tax will be due the following January.

Remember…

The perpetual aim of a business owner will always be to increase profits. However, don’t assume your surplus profits to be a measurement of your final payment, as there are many tax implications involved. Be sure to recognise your own tax band and match your dividend tax rate accordingly.

Importantly, assess the various permutations that are advantageous to your overall tax gain: hiring a qualified and experienced accountant with a track record of helping business owners take advantage of the best dividend tax rates in the UK is most advisable.

To find out more about dividend tax rates in the UK, and to begin setting up your own business address, contact Your Virtual Office London, today.

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