For years now, Dividend tax rates have increased. In addition, investors were faced with a large cut in already meager prices tax-free dividend allowance.
Let’s have a look at the present tax rates and exemptions for dividends. We’ll then consider how we came and what you’ll be able to do about it.
Dividend tax rates for 2023-24 and 2024-25
The tax rate you pay in your dividends will depend on your income tax bracket.
The UK dividend tax rates are currently:
- Property tax rate for taxpayers: 8.75%
- Higher rate taxpayer: 33.75%
- Additional tax rate for taxpayers: 39.35%
However, remember that depending in your total income – and where it comes from – you will have to pay a couple of rate of tax in your income.
These higher dividend tax rates went into effect on April 6, 2022. At that point, the tax rate was increased by 1.25 percentage points for every band.
In the 2022 mini-budget it was promised to reverse the rise. However, this was rejected by the substitute chancellor, Jeremy Hunt, when he took office.
I hope you are taking notes within the back.
We are talking about dividends distributed outside tax havens. Dividends and pensions earned through ISAs usually are not taken under consideration for tax purposes. Do you add your dividends on your tax return? Do not take into consideration dividends paid in ISAs or pensions. Forget them with regards to taxes. (Enjoy them because you may get wealthy.)
The tax-free dividend allowance 2023-24 and 2024-25
From April 6, 2023 the annual The tax-free dividend allowance has been reduced to £1,000.
In April 2024 the quantity will halve again to £500 for 2024-25.
Dividends received under the tax-free dividend allowance usually are not taxed. However, for those who exceed the allowance, the rest can be taxed in line with your income tax bracket.
Like other tax allowances, similar to the non-public allowance for income tax, the dividend allowance runs over the tax 12 months. (From April sixth to April fifth next 12 months).
The £1,000 dividend allowance means you routinely avoid dividend tax on only the primary £1,000 of dividend income. This dividend amount is tax-free, whatever the amount of your non-dividend income and your tax bracket.
As already mentioned, things will worsen from April 2024. From then on you’ll be able to only receive £500 before you have got to pay tax in your dividend income.
(Have you read anywhere concerning the old Dividend Tax Credit system? It was abolished years ago.)
What are dividends?
Dividends are money payments from firms:
- You may receive dividends from publicly traded stocks or funds that own them.
- You may additionally receive dividends from your individual limited company as a part of your compensation.
Dividend tax only comes into play on dividends received outside of a taxing authority.
Use ISAs and pensions is the important thing to protecting your income-producing assets from taxes in the long run.
What tax rate do you pay in your UK dividends?
If your dividend income exceeds the tax-free dividend allowance, you could pay tax on the surplus.
This liability should be registered and paid via your annual account Self-assessment tax return.
For example, for those who received £6,000 in dividends, tax could also be due on £5,000 of this. (£6,000 less the £1,000 tax-free dividend allowance for 2023-2024).
As previously mentioned, the tax rate you pay will depend on which tax bracket your dividend income falls into.
Beware of being pushed into the next tax bracket
If you own dividend stocks outside of an ISA or pension plan, the dividends can add significantly to your overall income. Maybe enough to place you in the next tax bracket.
To avoid taxes reducing your returns, consider investing in ISAs or pensions.
If you hold funds outside tax havens, you could possibly also owe taxes on reinvested dividends. If you select accumulation funds, you will not be spared the tax burden – unless they’re safely stashed in your tax havens.
Pay attention to withholding tax on dividends
If you receive dividends from foreign firms, they could be subject to double taxation. Once from the tax authorities at the corporate’s registered office and again from Her Maj’s Best within the UK.
You even pay this withholding tax on foreign dividends held inside an ISA or pension.
However, there are reciprocal tax treaties between the UK and other countries. This can no less than reduce the entire amount of dividend tax you pay.
Your broker will do that for you.
Some jurisdictions don’t impose withholding tax on dividends from a UK pension. The most notable is the USA. (This doesn’t apply to ISAs. Choose where you protect your US stocks accordingly.)
Again, be sure that Their platform pays you US dividends in your retirement without collecting taxes.
It can all get a bit fiddly. Read our article on withholding tax.
Why was the old dividend tax system modified?
Then-Chancellor George Osborne overhauled Britain’s dividend taxation within the 2015 summer budget.
Apparently he desired to remove the motivation for people to establish as limited firms after which use dividends as a more tax efficient strategy to pay in comparison with salaries.
Osborne also said the changes allowed him to chop the company tax rate.
Whatever his intentions, as we now have seen, today’s rule applies equally to common stock dividends.
Worse still, the initially quite generous dividend allowance of £5,000 – designed to forestall small shareholders from being taxed on old dividend portfolios – can be just £500 from April 2024.
Osborne’s problem with dividends
The old dividend tax credit system was developed about 50 years ago.
At that point, corporate tax rates were over 50%. When you think about personal taxation, some people see the income of the businesses they own being taxed at 80% or more.
However, corporate tax rates have historically fallen.
And the federal government desired to simplify things.
The excellent news was that the confusing tax credit system got here out on top.
The bad news was that we now pay loads more taxes on dividends.
The changes upset some older, wealthy people. They had based their portfolios (and their retirement plans) on how dividends were previously taxed.
That’s because before 2016, the implicit “dividend allowance” was as much as £31,786 so long as your income from non-dividend sources was below your personal allowance.
As a result, some people had huge income portfolios outside of tax havens. This was positive back then because you could possibly get a lot in dividends before taxes were due.
How things have modified!
Some people saw their dividend tax bills skyrocket
Most small investors usually are not affected by the changes to dividend tax. Most of us hold shares in ISAs and pension schemes as of late.
However, there are exceptions.
Small business owners who paid a dividend from their limited firms now pay more taxes. Salary-level dividends cut through today’s paltry dividend allowance.
There can be the dwindling group of older investors who’ve built up large portfolios of income shares from ISAs and pensions. You also pay loads more taxes.
Always use your tax havens
For years I even have urged these dividend investors to place as much money as possible into ISAs. One way they may do that is by defusing profits to fund their ISAs.
The ISA allowance is a “use it or lose it” affair. You need to construct your overall capability over a few years.
Still inexplicable to meSome argued – even within the comments – that it made no sense.
Dividends would only be taxed when the upper tax bracket was reached, it said. Why hassle?
That was true under the old system. And possibly it could be harder to make a choice for those who even have massive savings. Because when rates of interest were higher, there was more competition on your annual ISA allowance. (A dilemma that can return when rates of interest on savings accounts return to around 5%.)
But the reality is that taxes on dividends were at all times subject to alter. And finally they did.
At this point, individuals who had refused to transfer some or all of their portfolios into ISAs – just to save lots of a couple of kilos – were faced with heavy tax bills.
I hate to say I told you. (Really – I write a blog to assist people.)
ISA accommodation costs nothing. Even then, there was at most a small difference in cost between an ISA and a general account. Nowadays there normally are not any.
Move any unhedged portfolios into an ISA (and/or a SIPP) as quickly as possible for those who can. Not only to avoid dividend tax, but additionally to guard against capital gains taxes and other future regulatory changes.
