There are many investing strategies. One that has been popular for a while now is dividend investing. One question that a lot of dividend investors are asking – how much is dividend tax in the UK currently?
Below I will review the tax structure that is in place currently. One thing you need to keep in mind – the below is only valid as of the moment of writing. The rules and taxes change frequently.
You will find the tax rates and the brackets for when these apply to you below. I will also give an amazing hack on how to invest your money in a way so you do not have to worry about paying any tax ever.
what are dividends?
Firstly, let me start by explaining what exactly these dividends are.
Dividends are profit distributions by some companies to their shareholders. There is no set in stone rule how much these have to, their frequency or even if the company has to pay these to start with.
You often find dividends being paid by more established companies. Those that have achieved certain level or size and have fairly steady profit coming in.
As mentioned above – it is only SOME companies that pay dividends. When making your early investing decisions make sure you are fully aware if companies you pick are dividend payers or growth stocks that will rarely pay any dividend.
what is dividend tax?
Since the taxman heard that you decided to become a dividend stock investor and won’t be paying any Capital Gains Tax – there was a need to find a way to get a cut on your income.
Dividend tax is something that needs to be paid in a similar way to the income tax. The actual amount you will be expected to pay will depend on the level of income you generate from other sources.
how much dividends are tax free in 2023/24?
There are some good news when it comes to dividends. Not all of it is taxable.
The first £1,000 you receive in 2023/24 is tax free. This is both good and bad news.
It is good as obviously getting anything for free is always welcome. And if you think of it – a reasonable dividend yield paid by a company is somewhere between 2% and 4%.
If we take 3% as an average dividend yield – it would be required to invest over £33,333 to receive £1,000 in dividends annually. That’s a fairly sizeable amount for anyone just starting their investing journey.
There are few bad news here however. Firstly, for those who have been dividend investors for a while – the tax free amount was reduced from last years £2,000.
What is even worse – the tax free dividend amount is being further reduced in the following financial year down to only £500.
For those who are receiving dividends and these are below the tax free limit – you do not need to fill in self assessment. This at least reduces the amount of admin you have to do.
how much dividend tax I have to pay in 2023/24?
There are 4 different tax bands that you fall into. The summary of these is below.
You will always fall into one of the 4 tax bands above … unless these change and then you will be part of one of the new brackets. Dividend tax bands are aligned to the tax brackets that you pay your income tax on. The only difference is the amount of tax that you have to pay on your normal income vs the dividends you receive.
which dividend tax band I fall into?
As mentioned above, the dividend band will be aligned to your income tax bracket.
Your tax bracket is:
- Personal allowance on income below £12,570 where you pay no income tax
- Basic rate on income between £12,571 and £50,270 where you pay 20% income tax
- Higher rate on income between £50,271 and £125,140 where you pay 40% income tax
- Additional rate on income above £125,140 where you pay 45% income tax
So depending on your current rate of income you can work out which dividend tax band you will be in.
An example of this can be a person earning £60,000 per year and getting a further £5,000 in dividends in a year. Their total tax bill will look in a following way:
- No tax on the first £12,570
- 20% tax on everything between £12,571 and £50,270 (tax = £7,540)
- 40% tax on everything between £50,271 and £60,000 (tax = £3,892)
- No tax of the first £1,000 of dividends
- 33.75% tax on remaining £4,000 (tax = £1,350)
A total amount of tax paid in the above scenario would be £12,782. For those who try to match their payslip with the calculations above – these won’t match. The above calculation doesn’t include national insurance or pension contributions that might be present on your payslip.
this is how you can avoid paying tax on your dividends
There is however a legal way you can avoid paying any tax on your dividends for life. And this secret is called an ISA account for those living in the UK.
These are tax advantaged accounts that allow you to invest and pay no tax on dividends or capital appreciation for life.
With these accounts you are able to invest up to £20,000 each financial year. Many platforms will give you a lot of freedom in terms of types of assets you can invest into.
Dividend investing is a great strategy to explore with your ISA. You are able to invest a large amount each year to start your journey off. Reinvesting your dividends at a later date will allow you to enjoy the full power of the compounding effect.
summary
Dividend investing is a great strategy for those looking for steady passive income source. There is however a watch out for those building their dividend portfolios outside of tax advantaged accounts.
The tax in the UK can be quite expensive although it currently is below the standard income tax rates. It is however worth considering these if dividends is a major part of your future retirement planning process.
If you start planning and investing early – make sure to use the full range of benefits offered to you through tax advantaged accounts like ISAs. I personally hold my ISA with HL and would highly recommend it to anyone looking for one.
These can reduce your tax bill to zero and allow you to enjoy the benefits of larger source of future income.