What are dividends?
A dividend is a sum of money that a limited company pays out to someone who owns shares in the company, i.e. a shareholder. Tax on dividends is paid at a rate set by HMRC on all dividend payments received. Dividend income is taxed 0% for the first £2,000, no matter what other non-dividend income a person has.
Example 1: How Tony pays tax on dividends
Tony is the director of a limited company of which he is also the only shareholder. The company has made £1,500 profit after Corporation Tax over the last three years which Tony decides to pay out as dividends.
As Tony owns 100% of the shares he also receives 100% of the dividend payments.
In his tax return for the year the dividends are due, Tony must declare the dividend payment on his Self Assessment tax return. As the £1,500 he receives is under the dividend allowance he has no tax to pay on his dividends.
Example 2: How Sandra pays tax on dividends
Sandra receives a non-dividend income of £7,670 and a dividend income of £14,000 from shares. To work out how much she has to pay tax on, Sandra must first deduct her Personal Allowance from her non-dividend income:
£7,670 - £12,570 = 0 to pay in tax with £4,900 of her Personal Allowance left over.
She can then deduct the remainder of her Personal Allowance from her dividend income:
£14,000 - £4,900 = £9,100
Sandra now deducts her dividend allowance:
£9,100 - £2,000 = £7,100 total taxable income from dividends.
Since Sandra's earnings are within the basic threshold, she will pay:
£7,100 x 8.75% = £621.25 tax on dividends
For more examples of how the dividend allowance works check out HMRC's dividend allowance factsheet.
How to pay tax on dividends
|Online or telephone banking (Faster Payments)||Same or next day|
|CHAPS||Same or next day|
|Bacs||Three working days|
|Debit card||Same or next day|
|Credit card (1.5% charge)||Same or next day|
|Cheque through the post||Three working days|
|Existing Direct Debit||Three working days|
|New Direct Debit||Five working days|
|PAYE tax code||N/A|
|At the Post Office||Same or next day|
|At your bank or building society||Same or next day|
Note: If you usually send a Self Assessment tax return you must declare any income from dividends in the ‘Dividends’ section of your tax return.
If you don’t fill out a tax return you can call the HMRC helpline to arrange an alternative method of payment. The total amount of Income Tax due, including tax on dividends, following completion of your return can be paid in the following ways:
Online or telephone banking: If you’re paying by online or telephone banking (Faster Payments, CHAPS or Bacs) details for the HMRC bank account you should pay your tax bill into can be found here.
Debit or credit card: If you are paying by debit or credit card you can do so by following the links from your HMRC online account.
Direct Debit: You can set up a Direct Debit from your HMRC online account. The first time you set up a Direct Debit for Self Assessment allow at least five working days before you submit your return to ensure the payment is taken from your account in time. Thereafter allow for at least three working days. Note that you have to set up a new direct debit every time you wish to make a payment and that payment on account requires a separate Direct Debit.
PAYE tax code: If you already pay tax through PAYE and owe less than £3,000 in total HMRC can automatically take what you owe through your tax code. This will be taken from your salary or pension in equal instalments over 12 months. Note that you must have completed your paper tax return before the 31st October or your online tax return by 31st December to be eligible. If you meet all three requirements but do not wish to pay in this way you should notify HMRC by ticking the relevant box on your tax return.
At the Post Office: This is only an option if you get paper statements from HMRC and have a paying-in slip which they sent you. You can pay a maximum of £10,000 by debit card, cash or cheque made payable to ‘Post Office Ltd’. If your bill is more than £10,000 you will have to use an alternative method of payment.
At your bank or building society: You can only pay your Income Tax bill at your bank or building society if you still get paper statements from HMRC and have the paying-in slip they sent to you in the post. Payments can be made by cash or cheque made payable to ‘HM Revenue and Customs only’ followed by your Unique Taxpayer Reference (UTR) followed by the letter ‘K’.