Dividend tax explained — Which?

What is dividend tax?

If you own shares in a firm, you can earn money in two ways: by selling the shares if they increase in value, or by receiving dividends paid by the company if it decides to distribute earnings to shareholders. Dividends can be an excellent way to create consistent income from your assets. However, like with any other kind of income, you may be required to pay taxes.

How much tax do I pay on dividends in 2021–22?

You will not have to pay any tax on dividend income up to £2,000 in the 2021–22 tax year. This is known as the tax-free dividend allowance, and it has remained constant since 2018–19. In 2017–18, the stipend was reduced from £5,000 to £4,000. Above this dividend income tax-free allowance, you pay tax based on the rate you pay on your other income — known as your ‘tax band’ or sometimes called your ‘marginal tax rate’.

When is dividend tax payable?

Because of the £2,000 exemption, you’ll need a rather significant portfolio outside of your Isa before you’ll have to pay dividend tax. Dividends from stocks and funds are not guaranteed, and the amount you receive will be determined on how much profit the firms in which you participate make and how much they return to shareholders.

Do I pay capital gains tax on shares?

When the time comes to sell your shares, you may have to pay taxes on any profits you make. This is a capital gains tax (CGT). Capital gains, like dividends, have an annual tax-free allowance. This is £12,300 in 2021–22, the same as it was in 2020–21.

If your profit from selling your shares is less than this amount, you will not have to pay tax. Gains beyond this threshold are taxed at 10% if you are a basic-rate taxpayer, or 20% if you are a higher- or additional-rate person. More information can be found in our guide on capital gains tax on shares.

If you’re not yet an Accotax (Accountants in London) client, we can make paying yourself tax-efficiently easy, with all your HMRC payroll and dividend forms taken care of. Even better, you’ll get all the support and advice you need, plus all your company tax filing taken care of. We can even prepare and file your annual Self Assessment tax return. Find out more about our great-value Limited company accountantsPackages.