Before we have a look at the tax implications this year and next, first let’s recap what they are. A dividend essentially is a portion of profits from a business that is returned to its shareholders. This means that if you are a shareholder in a business, dividends can be a way to take money out of the company. This can be instead of a salary or taking a lump sum out. However, as you may suspect, there are tax implications dependent upon how much you take out. And it’s this topic of dividend tax we are going to look at today.
Dividends are also a way for investors to earn money from their investments without having to actually sell any of their own shares. This can provide them with a passive income whilst maintaining their shareholding in what could be a flourishing and rapidly growing business.
It’s important to note that not all companies/businesses will pay dividends. However, those that do appear a lot more attractive to investors and this is a huge incentive for them to invest in such businesses. This is why some investors will only and deliberately seek out businesses that offer these payments.
Do I have to pay tax on dividend payments?
Now we have quickly recapped what dividends are, we are going to take an even deeper look at the tax implications. This concerns both if you’re a shareholder in a business, or if you own a business that offers such payments to your shareholders.
So there are various tax rates depending upon how much you are wanting to take out, your total income, and what tax bracket you fall into. These tax rules are in place however to prevent abuse of what is a fairly flexible and nice system for shareholders. And it was, last year as follows:
- 0% on the first £2,000 from dividends (this is called the Dividend Allowance).
- 0% if your total income is under the Personal Allowance (£12,570).
- 75% if you’re a basic rate taxpayer.
- 75% if you’re a higher-rate taxpayer.
- 35% if you’re an additional rate taxpayer.
The dividend allowance had remained at £2,000 back to 2019 and was £5000 prior to that. Meaning that you could withdraw £5000 of profits out of a business you had shares in without paying any tax. However, in the next section, we will explain how this is due a drastic change.
What to expect this year?
The above was the dividend tax rate from last year. However this year things are about to change…
The dividend allowance, which sat at £2,000 tax-free last year, is set to reduce to £1000 from April 2023. And then it will further reduce to £500 from April 2024.
The 8.75%, 33.75%, and 39.35% rates that applied to the basic, high-rate, and additional rate tax brackets respectively however will stay the same.
The reasoning behind this that the government stated was “supports the government’s objective of putting the public finances on a sustainable path in a way that is fair“; and is done with the intention of those who earn higher taking a higher burden tax-wise.
Other things you should know about dividend tax
It is really important to know exactly what you’re entitled to and what it’s going to cost you when accessing it when it comes to dividends. And so just to clarify, here are some pointers.
Your dividend tax allowance, which at the moment is £2000, reducing to £1000 then £500, resets each year. This meant previous to this year you could have withdrawn £2000 tax-free through dividends each year. This will now equate to £1000 from April this year (2023) and £500 a year thereafter.
You will also not pay any tax on any dividend income that falls within your personal allowance. This is the amount that you can earn each month without having to pay tax, which typically is £1,250 per month for most people. Meaning that if you don’t have a salary otherwise, you can still take a dividend of up to £1000 tax-free.
Do I need to contact HMRC?
If for any reason you have withdrawn dividends from your business that exceed £1000 from April 2023, you will be required to notify HMRC that your income exceeded these thresholds. Any failure to report this to HMRC could land your business in hot water and could result in hefty financial penalties being handed out. This needs to be done by the 1st of October 2023.
You will then need to, by the 31st of October, submit a self-assessment tax return. If you’re unsure of how to do this we’re more than happy to help and advise you to put your worries at ease. This date is for paper applications only, or if you’re going to do it online, it will be on 31st January 2024. It is also important you file this tax return as failure to do so could result in additional penalties being handed out.
Want to know more?
Before deciding whether to allow your shareholders to take dividends out of your company, or to take an income through dividends, it’s vital to know where you lie when it comes to the tax implications. We are on hand here to advise you and let you know what other options may be available to you; to take income either out of a business you own or a business in which you have shared.
Get in touch and have a chat with us today. We will be happy to advise you on the best way to withdraw income from your business in a tax-efficient way. We also specialise in providing advice revolving around a profit-first-centric model; that allows your business to focus its finances in a productive manner.