As a business owner in the UK, there are a broad range of dividend tax rates that affect how much money you can take from your company and put in your own pocket.
When it comes to getting paid, there are a number of ways business owners can optimise their income - we’ve recently outlined the best scenarios in our guide: Salary or Dividend?
But to really make the most of your take home pay you need to be fully aware of UK dividend tax rates, so Keir Wright-Whyte, Managing Director of our London accountants, has put together this article to ensure you have everything you need to understand how dividends are taxed in the UK in 2019/20.
Before we get into the different rates and how they come into effect, it’s important to understand that at the start of each tax year every individual is assigned a dividend allowance.
Dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. Further to that, the amount of dividend allowance is the same regardless of the tax bracket into which the recipient falls.
Where the allowance is not otherwise utilised, it allows for the tax-efficient extraction of profits from a family company.
Although termed an “allowance”, the dividend is really a zero-rate band, with dividends covered by the allowance being taxed at a rate of 0%. Significantly, dividends covered by the allowance form part of band earnings.
The dividend allowance is the value of dividend an individual can earn before they are taxed.
In 2019/20 the dividend allowance is £2,000, the same as it was for the previous tax year.
Once you start earning above the dividend allowance, the tax you pay depends on the dividend tax rates below.
If you’re familiar with last year’s dividend tax rates, you may be glad to know that the rate at which dividends are taxed in 2019/20 is the exact same. They are:
Basic rate - 7.5%
Higher rate - 32.5%
Additional rate - 38.1%
But how do these rates apply in reality?
Well, that largely depends on your personal income allowance and how it’s used in conjunction with your dividends. For the 2019/20 tax year, personal allowance is £12,500 - this means an individual can earn up to £12,500 tax free within the current tax year.
We would highly recommend enlisting the help of a tax accountant to ensure your calculations are accurate and tax trouble down the line doesn’t become a costly issue.
The bands are UK wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.
To understand which dividend tax rate applies to you, you must understand income tax rates first.
Generally speaking, the rate of income tax and subsequent amount of income tax you pay is calculated based on how much income you receive in a given tax year.
On that note, these are the income tax rates for the 2019/20 tax year:
If you get less than £12,500, this falls within the personal allowance and you won’t pay any tax.
Income between £12,500 and £50,000 is in the basic-rate tax bracket
Income between £50,000 and £150,000 is in the higher-rate tax bracket
Income above £150,000 is in the additional rate tax bracket.
In addition to the above, it is important to note that you’ll start to lose £1 of your personal allowance for every £2 you earn over £100,000.
In 2019/20, Individual A receives a salary of £25,000 and dividends of £30,000. Their personal allowance of £12,500 and the first £12,500 of his basic rate band is used by his salary, on which he pays tax of £2,500.
The first £2,000 of their dividends is covered by the dividend allowance and is tax-free. However, the allowance uses up £2,000 of their basic rate band, leaving £35,500 available (£50,000 - £12,500 - £2,000).
Individual A’s £30,000 of dividends is taxed at the dividend ordinary rate of 7.5% as their earnings fall within the standard rate bracket.
Therefore, the tax payable on their dividends is £2,250 ((£2,000 @ 0%) + (£30,000 @ 7.5%)).
The way you pay tax on dividends depends on how much you earn as dividend income.
Those who are self-employed will most likely need to use their Self Assessment to inform HMRC of dividend earnings as anything over £10,000 must be included in the individual’s tax return.
For those earning under £10,000 in dividends, they will be required to contact HMRC directly, or through their accountant, and have their tax code changed.
Our accountants in London are always on-hand to help and are experts when it comes to tax treatments under the UK tax system, including dividend tax.