Dividend is taxed based on the total dividends received in a tax year which runs from 6 April to the following 5 April. So, for example, dividends received in the year 6 April 2020 to 5 April 2021 will be taxed in 2020-21 tax year based on tax rates applicable for that year. There are different rules for UK non-residents and non domiciled or deemed domiciled.
Dividend income is taxed at the top slice which means it is taxed after other income sources such as income from employment, self-employment and savings. So, the tax rate for dividends is determined by the rate of income tax you pay on your total income and the tax bracket you fall under. If you are a basic rate tax payer, this is 7.5% and if a higher rate tax payer, it is 32.5%.
What are the dividend tax rates and thresholds?
The following tax rates apply to dividends received in 2020-21 and 2021-22:
|Tax Bands||Dividend Tax Rates||2020-21||2021-22|
|Nil rate||0%||£0 – 12,500||£0 – 12,570|
|Basic rate||7.5%||£12,501 – £37,500||£12,571 – £37,700|
|Higher rate||32.5%||£37,501 – 150,000||£37,701 – 150,000|
|Additional rate||38.1%||> £150,000||> £150,000|
What is dividends allowance?
In addition to your Personal Allowance (a tax free allowance), there is also a dividends allowance (dividend nil rate band) of £2,000 on which no tax is payable. So, if you have dividend income only with no other sources of income, the first £14,500 of dividends received in 2020-21 (£14,570 in 2021-22) would be tax free.
However, as explained above, if there are other sources of income such as income from employment, self-employment or savings then those will be taxed first so the Personal Allowance gets used up by those other sources of income which could push dividend income to the upper tax bracket.
When is dividend tax due for payment?
Like any other income tax, dividend tax is payable by 31 January following the end of tax year in which the dividends were received. So, for example, tax on dividends received in 2020-21 tax year must be paid by 31 January 2022. There are different rules for UK non-residents and non domiciled or deemed domiciled.
Who pays tax on dividends received from a Personal Service Company?
Like any other dividends, tax on dividends you take out from your Personal Service Company (PSC) is payable by you (the shareholder/director) from your own personal funds as it is your personal income tax liability, not of your PSCs. This means that company funds cannot be used to pay the director’s/shareholder’s personal income tax liability.
If company funds are used it will be treated as a loan from the company. If this happens frequently, HMRC could treat it as additional PAYE income and tax it as employment income.