What is dividend tax?

Dividends are paid out of company profits on which the company has already paid or is due to pay Corporation Tax. All shareholders receive a £2,000 tax-free allowance from HMRC.

The Dividend Allowance means that you won’t have to pay tax on the first £2,000 of your dividend income, no matter what non-dividend income you have. However, the Dividend Allowance will not reduce your total income for tax purposes.

How the tax on dividends is calculated

You’ll pay tax on any dividends you receive over £2,000 at the following rates:

Tax band Tax rate on dividends over £2,000
Basic rate (and non-taxpayers) 7.5%
Higher rate 32.5%
Additional rate 38.1%

Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £2,000 allowance.

The tax is payable by individuals (not the company) receiving dividend income. The tax is calculated on your individual Self Assessment Tax Return and needs to be paid before the 31 January deadline following the tax year end. There is no National Insurance Contributions (NICs) payable on dividends.

Example

For someone receiving a non-dividend income of £18,000 (i.e. salary) and dividends of £22,000. Note the total income (£40,000) is still below the higher rate tax threshold.

  • On the £18,000 non-dividend income:
    • £11,850 is covered by the Personal Allowance
    • The remaining £6,150 is taxed as the Basic Rate
  • Of the £22,000 dividend income:
    • The Dividend Allowance covers the first £2,000
    • The remaining £20,000 of dividends will be taxed at the Basic Rate
Further information on how the new dividend tax may affect you as a contractor or consultant can be found here.