The Lemon Fool

I was involved in a discussion about dividends elsewhere on this site and the tax issue came up in relation to dividends.

I am aware there is a dividend tax and the rate for 2023/24 is 8.75% for basic rate tax payers (and 33.75% for the higher rate). My question is whether this counts towards your net income for tax purposes also?

To give an example, if I receive £30,000 in dividends from unsheltered investment accounts (not ISAs or SIPPs) am I paying 20% tax on £17,430 (after the £12,570 personal income tax allowance) as well as 8.75% on £29,000 (after the £1k dividend allowance)?

Assuming my calculations are correct:

Income tax = £3,468.00
Dividend tax = £2,537.50

Total = £6,005.50

Alternatively, is the tax on the dividend component only (£2,537.50)?

I find this quite hard to reconcile with the personal income tax allowance, i.e. whether dividends count towards your use of it - which implies that it is counted as income also. The information I have read is not clear and most of the examples consider dividends and income separately, but some then go on to mention the personal allowance - which suggests it is classed as income which you also have to pay dividend tax on.

My (incomplete) understanding was that the dividend tax was partly introduced to dissuade contractors and others who are paid mostly or entirely via dividends from using them to avoid National Insurance. The double tax would make sense from that perspective, but I'm not sure whether my interpretation of the rules is accurate - I'm hoping it is not.

I think, on unsheltered UK dividend distributions, if you have no other relevant income you pay no tax on the first £12k570 of income allowance nor the £2k dividend allowance so only pay dividend tax of 8.75% on anything above £14570. For base rate. I might have misunderstood the regs though.

https://www.gov.uk/tax-on-dividends

My understanding is:

Your first £12570 is your personal tax allowance. Assuming no other income other than the aforementioned £30k of dividends you will be taxed on £16430 at 8.75% (£17430- £1000 **) for tax year 23/24, ~£1437 tax (total).



** Tax Year 22/23 = £2000 dividend allowance, Tax Year 23/24=£1000, Tax year 24/25=£500

(edit: When I followed this method, I calculated the tax due to within a pound of the HMRC figure tax demand.)

From the .Gov website

https://www.gov.uk/tax-on-dividends

"How dividends are taxed
- You may get a dividend payment if you own shares in a company. You can earn some dividend income each year without paying tax
- You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).
- You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance"

Looks like you might need to fill in an annual tax return as Dividends are over £10k.

"Pay tax on over £10,000 in dividends - You’ll need to fill in a Self Assessment tax return.
If you do not usually send a tax return, you need to register by 5 October following the tax year you had the income."

I had a similar question a while back, where MrsF has £2070 or so in Divis, then the £2k was at 0%, but the rest was taxed at 20%.

Eventually they wrote back with the attached, which I still don't really understand

The £225 relates to charity donations.

In the tax calc the amount of dividend above the Allowance is simply added to her income and taxed at 20%. As it is 20% of £70 rather than 7.5% (at the time) then I really can't be faffed for the sake of a tenner.

https://imgur.com/fMdVObQ (my image)



Note that if you want to use the Marraige Allowance Transfer, ALL income counts towards the threshold, not just earned income. If you do salary sacrifice to bring yourself under the threshold then that is fine, but if you pay into a SIPP to bring yourself under the threshold then their system rejects the transfer as your income is too high.

If you are under the HRT threshold for your total income

1) Deduct 2000 from dividends

2) deduct other income from your personal allowance

3) If you have personal allowance left, deduct that from your dividends

4) Pay 8.75% on what dividends remain

JohnB wrote:If you are under the HRT threshold for your total income

1) Deduct 2000 from dividends

2) deduct other income from your personal allowance

3) If you have personal allowance left, deduct that from your dividends

4) Pay 8.75% on what dividends remain

Isn't there also a £5,000 a year Savings Allowance if you are on a low income?

JohnB wrote:If you are under the HRT threshold for your total income

1) Deduct 2000 from dividends

2) deduct other income from your personal allowance

3) If you have personal allowance left, deduct that from your dividends

4) Pay 8.75% on what dividends remain

Thanks to everyone for the feedback on this question, it's very useful. The self-assessment aspect isn't a big deal for me as I've been filling returns out for years already anyway.

The tax situation for dividend income looks better than I had first feared. With that said, I'm going to need to read the revenue's guidance on this quite carefully and maybe consult with an accountant also to be certain of where I stand.

monabri wrote:My understanding is:

Your first £12570 is your personal tax allowance. Assuming no other income other than the aforementioned £30k of dividends you will be taxed on £16430 at 8.75% (£17430- £1000 **) for tax year 23/24, ~£1437 tax (total).

** Tax Year 22/23 = £2000 dividend allowance, Tax Year 23/24=£1000, Tax year 24/25=£500

(edit: When I followed this method, I calculated the tax due to within a pound of the HMRC figure tax demand.)

A second check...

https://www.limitedcompanyhelp.com/limi ... alculator/

The website is for tax year 22-23 so I've " adjusted " the income to £31k to offset the extra £1k of dividend allowance for that year compared to tax year 23-24.
( salary set to zero).

The total tax is £1437 which agrees with my previous calculation




Another check...same result.

https://www.1stformations.co.uk/blog/ch ... reholders/

Get in before 23-24 starts as the 2k dividend allowance drop to £1k and the following year it drops to £500
Plenty of time to move those equities into ISAs

ignotus20 wrote:I was involved in a discussion about dividends elsewhere on this site and the tax issue came up in relation to dividends.

I am aware there is a dividend tax and the rate for 2023/24 is 8.75% for basic rate tax payers (and 33.75% for the higher rate). My question is whether this counts towards your net income for tax purposes also?

To give an example, if I receive £30,000 in dividends from unsheltered investment accounts (not ISAs or SIPPs) am I paying 20% tax on £17,430 (after the £12,570 personal income tax allowance) as well as 8.75% on £29,000 (after the £1k dividend allowance)?

Assuming my calculations are correct:

Income tax = £3,468.00
Dividend tax = £2,537.50

Total = £6,005.50

Alternatively, is the tax on the dividend component only (£2,537.50)?

I find this quite hard to reconcile with the personal income tax allowance, i.e. whether dividends count towards your use of it - which implies that it is counted as income also. The information I have read is not clear and most of the examples consider dividends and income separately, but some then go on to mention the personal allowance - which suggests it is classed as income which you also have to pay dividend tax on.

I think the fundamental error you're making is assuming that the so called dividend tax is separate from income tax. It's not. The "dividend tax" is simply the income tax rate applicable to dividends.