As a shareholder of a company, it is very important to know how your dividend receipts are taxed in Self-Assessment.

When a limited company makes profits, they distribute the earnings to its shareholders in the form of Dividends.

A good idea of how the dividend is taxed in the UK becomes even more essential if the company is your own and you are both a director and a shareholder. The company does not have to pay tax on dividends paid out to you but you as a shareholder needs to pay tax on the dividend receipts in your Self-Assessment. Therefore, it is always advisable to seek the right guidance from your local accountant and your Tax advisor before finalising the dividends that you take for a tax year.

Determine whether you must notify HMRC or file a self-assessment for Dividends

It depends on the dividend amount that you receive and whether you are already registered for Self-Assessment.

In case you are not registered for self-assessment and your dividends do not exceed the yearly dividend allowance (it is £2000 for the tax year to 5th April 2023) then you have nothing to do.

If the dividends were between £2001 and £10000

You can inform HMRC by:

• Phoning them on their helpline number
• Requesting them to change your tax code in order for they can collect the dividend tax from your salary or pension.
• Include it in your self-assessment return, if you already submit the return.

If the dividends were over £10000

You need to file a self-assessment.

If you have not registered yet, you need to register by 5th October following the tax year you received the dividends.

Maximum Tax-Free Dividend that you can earn

You do not have to pay tax on dividend income if your total dividend receipts fall within your personal allowance and dividend allowance.

Personal Allowance covers all other income including dividends.

Therefore, provided you do not have any other income, the maximum dividend amount on which you do not pay tax is made up of the following for the tax year to 5th April 2023:

Personal Allowance         £12570

Dividend Allowance         £2000

The total comes to           £14570

How Dividends are taxed?

Your dividend above the £2000 dividend allowance is taxed based on which Tax Band you fall into.

The following table shows the tax bands and rates for an individual with the standard Personal Allowance of £12570:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £150,000	40%
Additional rate	over £150,000	45%

Both your dividend and other income are added to work out your tax bands.

The band-wise dividend tax rates are as under:

Tax band	The tax rate on dividends               over the allowance
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

 

Here is one simple example illustrating how dividend tax is worked out:

In the tax year to 5th April 2023, Sam received wages of £15000 and a dividend of £12000 from his limited company.

Tax will be calculated in 2 steps:

Step1 - The personal allowance of £12570 will be deducted from wages

Wages £15000 less £12570, which leaves £2430

On £2430, he needs to pay tax @20% that is £486

Step2 – The personal allowance is fully exhausted, so the whole dividend of £12000 is taxable.

But the first £2000 is taxed @0% as Dividend allowance

The remaining £10000 is taxed at 8.75%, which is £875 since his total income doesn’t exceed £50,270.

Sam needs to pay a total of £1361

We Doshi Accountants have been servicing small and mid-size businesses as their reliable business accountant in UK and as their Tax Advisors. Our 3000+ happy clients speak about our quality of work.

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For any further assistance on this, you are free to contact us at 020-8239-4999 or email us at dhruv@doshiaccountants.co.uk.