For years now, dividend tax rates have been increasing. In addition investors have been hit with a massive reduction in the already miserly tax-free dividend allowance.
Let’s run through the current dividend tax rates and allowances. We’ll then consider how we got here, and what you can do about it.
Dividend tax rates for 2023-24 and 2024-25
The rate of tax you’ll pay on your dividends depends on your income tax band.
UK dividend tax rates are currently:
- Basic rate taxpayers: 8.75%
- Higher rate taxpayers: 33.75%
- Additional rate taxpayers: 39.35%
But note that depending on your total earnings – and where it comes from – you could pay tax at more than one rate on your income.
These higher dividend tax rates went into effect on 6 April 2022. At that point the tax rate for each band was hiked by 1.25 percentage points.
A pledge to reverse the hike was made with the Mini Budget of 2022. But this was scrapped by replacement chancellor Jeremy Hunt when he took office.
I hope you’re keeping notes at the back.
We’re talking about dividends paid outside of tax shelters. Dividends earned within ISAs and pensions are ignored with respect to tax. Adding up your dividends for your tax return? Don’t include dividends paid in ISAs or pensions. Forget about them when it comes to tax. (Enjoy them for getting rich.)
The tax-free dividend allowance 2023-24 and 2024-25
As of 6 April 2023, the annual tax-free dividend allowance was reduced to £1,000.
It’ll halve again in April 2024 to £500 for 2024-25.
Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and the rest is taxed according to your income tax band.
Like other tax allowances such as the personal allowance for income tax, the dividend allowance runs over the tax year. (From 6 April to 5 April the next year).
The £1,000 dividend allowance means you only automatically escape dividend tax on the first £1,000 of dividend income. This level of dividend is tax-free, irrespective of how much non-dividend income you earn and your tax bracket.
As already noted, things get worse from April 2024. From then you’ll only be able to receive £500 before you start paying tax on your dividend income.
(You read somewhere about the old Dividend Tax Credit system? It was scrapped years ago.)
What are dividends?
Dividends are cash payouts made by companies:
- You may be paid dividends by shares listed on the stock market or by funds that own them.
- You might also be paid dividends from your own limited company, as part of your remuneration.
Dividend tax only comes into the picture on dividends you receive outside of a tax shelter.
Using ISAs and pensions is key to shielding your income-generating assets from tax for the long-term.
What tax rate will you pay on your UK dividends?
If your dividend income exceeds the tax-free dividend allowance, you’ll pay tax on the excess.
This liability must be declared and paid through your annual self-assessment tax return.
For example, if you received £6,000 in dividends, then tax is potentially charged on £5,000 of it. (£6,000 minus the 2023-2024 £1,000 tax-free dividend allowance).
As we said, the rate you’ll pay depends on which tax bracket your dividend income falls into.
Beware of being bounced into a higher tax band
If you own dividend-paying shares outside of an ISA or pension, then the dividends may add substantially to your total income. Perhaps enough to push you into a higher tax bracket.
To avoid taxes reducing your returns you should invest within ISAs or pensions.
If you own funds outside of tax shelters, you could also owe tax on reinvested dividends. Choosing accumulation funds doesn’t spare you the tax rod – unless they’re safely bunkered in your tax shelters.
Watch out for withholding tax on dividends
If you’re paid dividends from overseas companies, you may be charged tax on them twice. Once by the tax authorities where the company is based, and again by Her Maj’s finest in the UK.
You may even pay this withholding tax on foreign dividends held within an ISA or pension.
However there are reciprocal tax treaties between the UK and other countries. These can at least reduce the total amount of dividend tax you pay.
Your broker should take care of this for you.
Some territories do not charge withholding tax on dividends received in a UK pension. The US is the most notable one. (This doesn’t apply to ISAs. Choose where you shelter your US shares accordingly.)
Again, make sure your platform is paying you any US dividends in your pension without any tax having been charged.
It can all get a bit fiddly. See our article on withholding tax.
Why was the old dividend tax system changed?
Then-chancellor George Osborne revamped UK dividend taxation in the Summer Budget of 2015.
He apparently wanted to remove the incentive for people to set themselves up as Limited Companies and then use dividends as a more tax-efficient way to get paid, compared to salaries.
Osborne also said the changes enabled him to reduce the rate of corporation tax.
But whatever his intentions, as we’ve seen today’s regime applies equally to dividends received from ordinary shares.
Even worse, the initially fairly-generous dividend allowance of £5,000 – designed to avoid small shareholders being taxed on legacy dividend-paying portfolios – will be just £500 from April 2024.
Osborne’s problem with dividends
The old system of tax credits on dividends was designed roughly 50 years ago.
Corporation tax rates then were above 50%. Add in personal taxation, and some people saw the income earned by the companies they held taxed by 80% or more.1
Since those ancient days, however, corporation tax rates have fallen.
And the government wanted to simplify things.
The good news was the confusing tax credit system got the chop.
The bad news was we now pay much more tax on dividends.
The changes threw a spanner into the works of 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.
So some people held huge income portfolios outside of tax shelters. At the time this was fine because of how much you could get in dividends before taxes kicked in.
How things have changed!
Some people saw their dividend tax bills soar
Most small investors have not been hit by changes to dividend tax. Most of us hold our shares within ISAs and pensions nowadays.
However there are exceptions.
Small business owners paid a dividend by their limited companies now pay more tax. Salary-sized dividends chew straight through today’s puny dividend allowance.
There also exists that dwindling cohort of older investors who built up a big portfolio of income shares outside of ISAs and pensions. They’re paying much more tax too.
Always use your tax shelters
For years I urged these dividend investors to move as much money as possible into ISAs. They could do this by defusing gains to fund their ISAs, for instance.
The ISA allowance is a use-it-or-lose-it affair. You must build up your total capacity over many years.
Yet inexplicably to me, some argued – even in the Monevator comments – that there was no point.
Dividends were not taxed until you hit the higher rate band, they said. So why bother?
That was true under the old system. And maybe there was a harder choice to be made if you also had massive cash savings. Because when interest rates were higher, there was more competition for your annual ISA allowance. (A dilemma that’s returned again with interest on savings accounts back around 5%.)
But the truth is taxes on dividends were always liable to change. And eventually they did.
At that point, the people who had declined to move some or all of their portfolios into ISAs – just to save a few quid – were hit with big tax bills.
I hate to say I told you so. (Truly – I write a blog to help people.)
ISA sheltering costs nothing. Even back then there was at most a trivial cost difference with an ISA versus a general account. Nowadays there’s usually none.
Get any non-sheltered portfolios into an ISA (and/or a SIPP) as soon as possible, if you can. Not just to avoid dividend tax, but also to shelter from capital gains taxes and other future regulatory changes.
Note: I’ve removed talk about the old way UK dividends were taxed in the comments to reduce confusion. We have to let go! But the discussion may still refer to old (or incorrect) dividend tax rates and allowances. Check the dates if unsure.
- Remember, companies paying you a dividend have already paid corporation tax on their profits. That’s before any dividend is paid to you. [↩]
Well, our plan was to take 25% PCLS from our pensions and use it to generate dividend income. We’re now going to have to use assets that generate significant less in dividends as we “ISA up” the PCLS. And no, taking the PCLS in stages isn’t a great option as I need to crystalise ASAP to avoid the ever-shrinking LTA.
This may seem a very naive question. I have a small portfolio of non-ISA funds in which dividends are automatically reinvested (so they do not come to me in cash). Do I have to pay tax on these ‘unrealized’ payments each year (through my self-assessment)? Or do I have to pay dividend tax only when the fund(s) are sold and the gain realized? And must I therefore subtract the amount from potential liability for capital gains tax?
It’s not naive and is actually a complex issue, so complex that I’d advise you not to do it! You have to report the dividends (even though reinvested) and keep track of your purchase prices for tracking gains (see “Section 104 holding”.) There are other complexities on top of this, so you really need to keep good records. However, using income funds or (even easier) using Investment Trusts is better.
@Peter — I’d second Gadgetmind’s comments. You even have to track income if you’re using so-called Accumulation funds that actually pay no income out at all.
See: http://monevator.com/income-tax-on-accumulation-unit/
Avoid this nonsense if at all possible by using shelters etc.
Some people might question whether you’ll actually get caught, true, but few of us here break other more well known rules on that basis so no reason to start here I’d counter. (Appreciate you’ve made no such suggestion yourself!)
As a basic rate taxpayer , does this mean from april 2016 the dividends I receive from my individual shares portfolio [= £1200 a year] which sits outside of an isa, I would pay no tax at all on the dividends as it will be under this new £5,000 threshold ,where currently I pay 10 % tax which is automatically deducted from the dividend?
If I listened correctly it sounds like a triple whammy against contractors – removal of the Employment Allowance (£2,000), tax avoidance targeting of “personal service companies” (the return of IR35?) and a lot more higher rate tax on dividends. Mitigated slightly by corporation tax eventually going down to 18%, but with something horrible probably to come for pension contributions… I’m sure we’ll get some more detailed analysis in the days to come.
@Dawn — You already don’t pay any tax on your £1,200 dividends. Please read the piece above. I have spent over a decade trying to explain this to people. I will be drinking Bollinger by the barrel come April and the day that tax credit and this confusion ends! 🙂
@BeatTheSeasons — Yep. I also thought it sounded like tax relief on pension contributions may well be in the firing line. Well, as I said in our big debate about inheritance tax the other day (which please let’s not re-start here — let’s keep it on that other thread if anyone has any further comments) we have a State (sure we can debate about the ideal size, but fact is it exists and no major party is abolishing it) and they’re going to have to find the tax one way or another. We will all have our preferences. They’re really coming for me in this budget; at least they didn’t meddle with CGT, which I did fear.
@the investor “some modest EVASION action may be possible” – should be AVOIDANCE. Tax evasion is illegal but tax avoidance isn’t and in my book at least tax avoidance is fine and to be encouraged. It’s a common slip and I have even heard it made by government ministers
@TI, I knew you would be quick off the mark to write this post.
I have a USA based account (outside an ISA/SIPP). USA and UK has agreement on double taxation so although the USA taxes the dividends at 15% I pay no further tax on the dividends.
Would I now pay an additional 7.5% on top of the 15% the USA has already taxed, over the £5,000 mark ?
Regards, Jon
Just a quick question for clarification. If you, say, earned £16,000 entirely through dividends, with no other income source, would you pay any tax at all? I.e. Are the income tax and dividend tax allowances independent, or additive?
@PI — Well, I was thinking of “evasive” in the sense that a WW2 pilot takes evasive action, not in the sense that Al Capone does. 🙂 But point taken. My incorrect use of the word “evasion” didn’t help, either, and you are right to flag the potential confusion (http://monevator.com/tax-avoidance-versus-tax-evasion/). Changed now!
@Jon — Good question, and we will need to await the detail to be sure. However if it works like the current withholding tax system treats higher rate tax payers (who currently pay 25% tax on dividends, and who are able to offset the US tax they pay on US dividends against their UK tax due) then I imagine you will have no further tax to pay, as a UK basic rate tax payer. You’ll likely have to go through some sort of reclaiming procedure though. See this article: http://monevator.com/withholding-tax-on-dividends/
@Nigel — As I understand it, you would not pay any tax on your dividend income if that was your sole income up to £16,000. I saw that because dividends will only be taxed at 7.5% for basic rate tax payers. In the situation you describe the first £5K of dividends are received tax free, and then the £11,000 will — from April — be covered by the higher £11K personal allowance kicking in, so you will not be liable for basic rate tax, and will be a non-tax payer. The Summer Budget document supports this view:
However I am NOT going to say that the allowances are strictly ‘additive’, despite them appearing to be so in this case. Often there’s detail in taxes that flushes out assumptions like that as misplaced in some circumstances. It’s probably better to always do your maths from first principles, based on your situation. (Note: Not a tax expert!)
Further to Nigel’s query, what would be the taxation implications in the following scenario with these three sources of income:
1. Non-ISA and Non-VCT dividends c.£10,000 pa.
2. Occupational Pension c. £5,000 p.a.
3. Part-time employment c. £5000 p.a.
In addition, income from peer to peer lending is, I believe, part of the new £1000 annual “interest” allowance, but what about the tax treatment after April 2016 for income from bond funds and retail bonds?
Many thanks.
This is just putting taxes up by stealth after a few rash election promises
Reduction on tax relief for BTL and this consultation on pension (again a smoke screen for with drawing up front income fax relief) are a lot more painful
@nevermind — As always I suspect that view depends partly on what you’re hit with. 🙂 If I do nothing different I’ll pay thousands more in tax next year, equivalent to PAYE basic rate rising from 20% to 27.5% I think. Quite a hike. But then my situation was geared for today’s status quo, and I likely *will* do something to mitigate it, at least in the year until lower corporation tax comes in.
I’ve been searching online to find the answer to this – wonder if you might have any thoughts. I hold my portfolio of dividend paying stocks in a Limited Company. Prior to this budget obviously the dividends would come in to my limited company and there was no further tax to pay due it being deemed as paid from whichever company issued the dividend. How do you think the recent budget changes affect this and/or where could I find out ?
@TI
you might find that the situation for contractors taking dividends is not as bad as you first feared as it doesn’t seem to have an adverse impact until you are well into HRT.
I did some maths and (in round numbers), if your income after expenses is £50k pa, you then take a £10k salary with the rest in dividends you’ll be a few hundred £s better off than at present. With an income after expenses of £100k you’d be ca £2.5k worse off.
So earn £100k, put £40k into pensions and you are probably about the same as at present.
It’s quite clearly a move to limit the benefits of being outside IR35. TBH as a contractor myself I think that this is ok and better than forcing everything through PAYE.
Richard
Another thought. Perhaps this new tax will encourage companies to issue C-shares rather than hand out dividends, like Rolls-Royce. C-shares are essentially capital returns so should avoid the dividend tax, but will of course be subject to CGT if the personal allowance is breached.
@gadgetmind, @The Investor – Can you explain why you consider taxation on unsheltered accumulation funds to be complex? It seems about the same as funds that pay out an income.
I found Blackrock’s guide here useful because it has examples:
http://www.blackrock.com/uk/individual/literature/income-equalisation/uk-reporting-fund-status-flyer.pdf?locale=en_GB&siteEntryPassthrough=true
You keep track of the base price you purchased at. When you sell units this is the value you subtract to calculate capital gains (same as for any shares).
The interesting bit is: each tax year you check the excess reported income report from the fund provider. You add the amount accumulated to your base price so that you won’t pay unnecessary capital gains on the accumulated units. You pay dividend tax on the accumulation for this year.
I think that’s it. Is there something I’ve missed?
Perhaps the problem comes if you invest monthly and thus have many base prices you need to record? If you invest a lump sum it seems fairly simple to handle.
Hello,
I’m a bit puzzled by Richard B’s comment. It seems to me (and I may well be wrong) that if you earn 50,000 in fees and take 10,000 in salary you will then have 40,000 to take in dividends. You get 5,000 tax free which means that you will be paying 7.5% on 23,000 (38,000-15,000) and 32.5 on the remaining 12,000. I make this 5625 against a current amount of 2400, which is just 20% on the 12,000 that is over the higher rate threshold.
For 100,000 it would be 21,875 vs 12,400 under the old system.
Having said that I agree that this is a fairer approach than randomly chasing people to try to prove that they don’t meet the rather vague IR35 criteria. It’s also fairer than cutting benefits – though he seems to have done that as well.
Sorry, I was using the wrong higher rate threshold. Duh! Richard’s numbers look about right.
So using the new threshold of 43,000 (sorry for my mistakes. I hope that my sums are right this time):
For 50,000 gross fees:
New dividend regime: 28,000 @ 7.5% = 2100
7,000 @ 32.5% = 2275
4375
Old dividend regime: 7215 @ 25% = 1803.75
(Threshold 32,785)
@ Simon – I’m afraid he’s targeting all contractors by trying to change IR35 to make them pay employment taxes. The following is from the full Budget document which can be found here: https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015
Hi Beat the Seasons,
Yes, I saw that. But if HMRC are receiving the money anyway through the new dividend taxation they may not be so concerned about possible abuses of PSCs ????
All the best …
Before you all start complaining too much about the new tax on dividends drawn from your single person company, why not a quick comparison with what you’d be paying if it was employment income?
That will be guaranteed to make you feel better…;-)
@Dawn – there is no ‘deduction’ of the 10% tax credit. It is fictional, an accounting device and not a real amount of money that has been taken from the dividend. So the only change will be that instead of being described as a ‘net’ dividend it will be described as a ‘gross’ dividend, and you will pay the new rates of tax directly if you exceed the £5000 allowance.
@ vanguardfan – I think the point is that IR35 is being beefed up so many contractors will find themselves paying exactly the same as if they had employment income, but without the same security and benefits of permanent employment.
And if higher rate pension relief is taken away as well then how exactly are you meant to save for retirement unless you’re lucky enough to be left a £1m house by your parents 🙂
@David : In short from April ’16, your personal allowance (£10,800) will cover your income from the pension and employment, with £800 to offset against part of the dividends. The £5,000 dividend allowance will also reduce the taxable part of divis down to [£10,000 – 800 – 5000 =] £4,200. Tax will be due at 7.5% on this, so around £315 tax to pay.
As for income from bond funds and the like, this is usually interest, and will continue to be treated as such (and potentially able to benefit from the £5,000 savings allowance).
Not complaining Vanguardfan. It does look like the change will make the system better so I’m happy to pay the extra. People who receive dividends are – almost inevitably – not the poorest so this tax is fairer than, say, increasing VAT or cutting benefits. It’s quite surprising that it has been introduced by the Tories.
What would make the system better would be for the government to stop tinkering with things on what’s becoming a quarterly basis.
Regarding IR35, contractors have worse coming. The Intermediaries Reporting regulations that came into effect this tax year give HRMC unprecedented levels of detail in a “real time” basis on contractor earnings. These hard numbers will be mined to figure out further screws in the next year or two. Contractor rates will have to go up or otherwise the “high end” contractor labour market will move offshore to more tax efficient locations, leaving Britain less competitive.
@Topman, yeeeeeeeeeesss I get it now!
That link is brilliant ,Ive printed it off too!,
@Invester, yes, you have a place in heaven im sure for your efforts to educate us but theres no to explain this anymore! just supply the link as Topman suggested to me above.
@Johnson — When I looked into doing what you are doing some years ago, I decided not to because as I understood it my Limited Company would be deemed an investment company with different rules and regulations. I don’t actually recall those rules/regulations, in detail so won’t presume to tell you about them, but you will need to look into them to see how the new situation impacts things… However I will say that if I recall correctly one reason I didn’t start investing within my company under the current regime was because of a disadvantageous tax situation (compared to shoveling money over into a SIPP and investing it there) once it was deemed an investment vehicle. Of course you may have already filled your SIPP, and this is Plan B. Accountant required, I think!
@Topman — Impinge away thanks if it means remembering things like that excellent AIC doc, which I recall I put in Weekend Reading but I’d forgotten all about. He does explain it well. Hurrah that from April 2016 nobody will have to! (Hopefully my good karmic points can continue to be accrued some other way… 😉 )
@Dawn — Glad you get it now. I wasn’t personally frustrated at you so much as the system and the Groundhog Day debates I’ve had about it for over a decade. 🙂 If I’d remembered that link, it would have helped!
@all — Re: The dividend/limited company rules, as I say I am confident I will pay thousands more in tax if I just repeated what I did this year. I don’t even need to use a calculator, it’s obvious from eyeballing the numbers and thresholds.
It’s not totally surprising, given the magnitude of the changes –it might not shock you to know that my situation is closely matched to today’s reality… 😉 Sure it will change for tomorrow’s reality, but that’s a separate matter.
Regarding the fairness of the change, I am in two minds. I am not a contractor, I own a business, work out of own premises and run my own hours and so on, and am paid by multiple clients (though some are bigger than others to be sure).
In contrast, I do have friends who work for the same company for literally two, three, or four years and then go to another one for a few years… To anyone who saw everything except their tax returns etc they look like employees. But they earn much more than they would as permanent staff. I accept they don’t have the rights of ‘permies’, as they insist on calling them, but the point is arguably they should because arguably they should be permanent staff. It does look like the spirit of the legislation is being gamed, as well as the law, in these instances, so I can understand official frustration. But there are better and more informed venues on the Internet to discuss such matters, I’d venture, so for my part I’ll leave this particular debate there.
Personally I am very happy to pay basic rate tax / corporation tax, but like many I do get annoyed at higher marginal rates. I’d prefer a flat 30% tax (say) across the board for everything and everyone and all ruses chucked in the waste paper bin. There would be casualties across the income spectrum, but massive wins in efficiency and clarity and the decline in avoidance.
Not something we’ll see in our lifetimes, I’d wager.
This is an interesting budget-related read, and is more than just a statement of the relevant numbers.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413970/TIIN_4168_income_tax_personal_allowances_and_basic_rate_limit.pdf
Am i right in thinking though this is a tax deduction for higher rate tax payers in certain circumstances. Previously a higher rate tax payer paid taxation on any dividend income held outside a tax free wrapper whereas the first £5k will now be tax free? It seems so tough to plan though given the various rules seem to change every year.
@Nic — Correct.
@TI – on keeping income yielding stocks in isa/sipp wrappers; could you comment on/link to an article explaining in which account type one would place shares, bonds, share ETFs, bond ETFs etc. in the most tax efficient way?
TI, you’re right to say I told you so, when you can sock away 55k pa in SIPPs and ISAs there aren’t many excuses to hold shares outside of a wrapper unless you are rich, daft, or just like complicating tax returns.
As for the impact on ltd company contractors, well this is a game changer for me. I had progressively reduced SIPP contributions over the last couple of years to prioritise mortgage over payments.
I’m not as bullish on equities long term as some on here, ditto bonds, and like guaranteed security of wiping out the mortgage, but this divi tax has tipped the balance.
Was intensely relaxed about paying 40% tax before (hey, working in London and living in the south east its difficult not to incur), but as it nudges close to 50% I will limit income to 43k next year and stick the rest in a SIPP as company contributions.
Perhaps leave a bigger reserve in the company to take in future lean years, but with talk of IR35 risk increasing the arguments for bunging all you can into a SIPP while you can are stronger than ever.
Any other contractors out there planning for next year?
You don’t need to be “rich” to have unwrapped shares, just have a larger lump sum come in than you can put into ISAs in one tax year. My wife got an insurance payout that gave her a sum that will take a few years to “ISA up”, I sold an SAYE causing the same “problem”, and others may take pension lump sums. Previously, people in this case could just hold unwrapped equities and if basic rate tax payers not worry about dividends. With these recent changes, they will have to take a lot more care.
We’re already close to the £5k limit so my wife may have to pay our broker £25 a pop to move some of these holdings into my name.
We certainly weren’t the intended target for these changes, nor were pensioners investing their lump sums, but we’re certainly victims.
Simon
For £ 10k salary plus 40K net dividend I make it total £ 2,575 tax under old rules for 16/17 and £ 3,050 under new:
OLD:
Gross dividend = 44,444 less £1k remaining personal allowance = £ 43,444. £ 32,000 taxed at 10%, 11,444 taxed at 32.5% less £ 4,344 tax credit.
NEW:
£ 40k dividends less £ 1k remaining PA less £ 5k new allowance = £ 34k taxable dividends. £ 32k @ 7.5% and £ 2k at 32.5%.
She got given an insurance payout in the form of dividend paying shares?
Seriously though, anyone getting a 6 figure windfall is an edge case really, I should have put a disclaimer covering every possible exception to my rule but I was already waffling enough.
It must be exhausting writing the blog itself trying to caveat every single statement 🙂
One of the motivations as to why I’ve always urged people to use ISAs and SIPPs is because in my early years I didn’t myself, even for cash (I only started about 12 years ago, which was nearly a decade into my accumulating), and so I know the pain of which I speak. (CGT hassles, paperwork, and even before this dividend change a need to watch what sort of shares you own unwrapped due to dividend income potentially pushing up your higher-rate taxed income and so forth).
I’ve always hoped my muppetry would inspire people to be less silly! I give myself a slight pass on the SIPP front, because pensions were only made tolerably flexible for me in the past five years or so, but I should have at least been loading up cash ISAs from my early 20s.
The result is that despite fairly modest (by London standards) earnings over most of my working life, my investing mania (and reasonable success) means I now have large unwrapped holdings that are even today significantly into six-figures, despite annual defusing and liquidation attempts. Managing this has been an annual headache for a long time now.
Is it not a high class headache to have, you say? 🙂
Sure, though I’d counter that money didn’t come from nowhere or some Maiden Aunt’s estate, it’s all from sacrificed (relatively modest by London standards etc) earnings and so on.
So Gadgetmind is right that you don’t have to be rich to have unwrapped holdings (depending on your definition of rich).
My beef with ISA refuseniks was that you did have to be pretty silly to continue adding to unwrapped holdings if you had at the very least ISA capacity going spare, once someone like me had returned, Ancient Mariner like, to tell you to wrap all you can as soon as you can! 😉
Somebody understands my pain! *falls to floor weeping* 😉
@DM — We’ve tried to write that article a couple of times but it’s very tricky because it partly comes down to individual circumstances (such as tax brackets) and it *always* is influenced by exactly what you have in your portfolio and your time horizons.
But I agree it’s a useful topic. I’ll try and get one written that’s caveated to the back and beyond that at the very least explores these issues sometime soon.
> She got given an insurance payout in the form of dividend paying shares?
She got an insurance payout and used it to buy assets designed to generate a future income stream in a tax efficient manner. This is pretty common in cases where someone may not be able to work in future due to illness or injury.
Perhaps such people are corner cases, but hitting those using capital to generate income is a bit of a blunderbuss and a lot of collateral damage is very likely.
We’re lucky because my wife can still do some work, but doesn’t need to (we started the insurance when she did, and when there were also childcare needs), and because we can rejig things to avoid this new tax. However there will be a lot of unintended consequences for many people.
@gadgetmind – “a lot of collateral damage is very likely.”
I wonder what the normal curve will be? Personally, in my pensions plus ITs scenario, I look to be 2% down on net income as a result of the 8 July budget, which is unwanted although not disastrous but dare I ask TI what he thinks his hit will be, after all possible mitigation?
Perhaps there will be an angst divide between the accs and the deaccs, with the latter more dependent on dividends?
@Gadgetmind, Investor
If this were on Twitter it would deserve the hashtag #firstworldproblems
Treatment of dividend income has been preferential for awhile as income tax has been cut back and NI treatment for the self employed has been too
Now its just closer inline with what employees pay in income tax and NI
On the whole, I am comfortable with the change and it is certainly a lot simpler than the current tax credit system, although it is likely to cost us for a few years until we can dispose of all the non-tax sheltered investments we have. Thank goodness they did not tinker with the CGT allowance, as the lib-dems were suggesting.
We have made good use of the ISA allowances (and PEPs before that) so most of our investments are already tax sheltered. I did crystallise my SIPP a few years ago though and invested the 25% lump sum. We are drawing this down, but I have to draw from my SIPP as well otherwise I am likely to have a Lifetime Allowance problem when I reach 75.
I need to see the full details of the changes before deciding what to do, but (I know TI will hate this) I suspect we may give money away to my children so they can pay off university loans and buy property. We had already intended to do this, but will probably bring the plans forward.
We were fortunate enough to be paid to go to university and bought property using mortgage debt that was rapidly withered away by inflation. The young seem to have a much tougher time than my generation did and not only in higher education and property costs. I have noticed that on average they have to work much harder, due to increased competition, right the way through from primary education to employment.
@Nevermind — Regardless of the merits of the change, it’s a tax hike of 5-8% or so for anyone taking more than about £21.5K in dividends, whether from a company or from their investments, which will likely affect (modest) millions of people.
Would you describe describe a 5-8% tax hike as a first world problem if applied to normal income tax, too?
Actually, while I’ve been typing Hargreaves Lansdown has released a new Dividends calculator, so anyone can have a play and see the impact:
http://www.hl.co.uk/shares/dividends-tax-calculator
The tax treatment of dividends from legitimate small businesses was different *for a reason*. Proper small businesses have to take care of all kinds of things that companies’ take care of for their own employees, and employees have all sorts of rights and financial safeguards that you don’t have when running your own small business, unless you put them in place yourself, which costs time, effort, and money.
Now I’ve expressed some sympathy previously in this thread with the Government about the issue of contractors who to all intents appear to be employed for years on end at the same office with the same employer, but were taxed more favourably than someone sitting next to them on the pay roll. Although for what it’s worth many of them would say what I just wrote above is true of them too, but I think this is covered in most cases by the fact that their rates of pay are much higher than permanent salaries, also. I suspect the government’s attempt to address these ’employee contractors’ via the IR35 legislation hasn’t done the job, so they’ve had to get out the blunderbuss and hit everyone.
The government expects to raise £7 billion from the dividend change, in its own estimates. Again, hardly small beer.
Meanwhile we will now have the prospect of people getting £1 million tax-free from their parents, for doing nothing. And most people think that’s fairer and presumably some think it better for the economy. @Naeclue is quite right that the young have it tougher — and it’s going to get even tougher for those without wealthier parents as these inheritance tax-freebies further distort the property market.
(It’s amusing to me that under Tory doctrine, somebody getting £20,000 handouts from the State is unproductive and should be penalized, but somebody receiving £1 million tax free from their parents is an heir to be nurtured and encouraged. It’s *almost* enough to turn me lefty again! 😉 )
Corporation tax at 20% plus the new 32.5% dividend tax rate will now see a large portion of my company’s earnings taxed at 52.5% before it reaches me. Not motivating.
Personally I’ll probably load up my SIPP to the maximum that I am allowed, withdraw much less from the company and instead draw down on non-ISA’d investments via sales, and then work fewer hours and earn less money, perhaps spending more time drinking wine in the sun abroad in low-cost economies. They can’t tax free time. 🙂
I’m an edge case and a minority no doubt, but essentially this is the sort of thing that happens when you excessively tax productive people.
Anyone thinking about using SIPPs as part of their FI strategy should have a read of the new green paper on pensions. My fave bit is this:
“pensions tax relief is designed to provide an incentive for individuals to defer their income until their retirement. However, the gross cost of pensions tax relief is significant. Including relief on both income tax and National Insurance contributions, the government forwent nearly £50 billion in 2013-14.”
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/442159/Strengthening_the_incentive_to_save_consultation__print_.pdf
I expect some kind of ISA plus for pensions using taxed income going in and tax free going out with a government top-up to the fund to come in this parliament
@Neverland — Agreed. I do think we’re into use it while you can territory with the current pension reliefs. There’s a lot of different ways they could go with a replacement though.
I think the idea of ISA style pensions (after tax income in + some tax/NI carrot, untaxed income out) has a lot of merit. The drawback I can see is the reduced incentive to draw too much out too early in retirement. With the current system you pay income tax on drawings and can pass on any residual pension pot to beneficiaries, so there are additional incentives to leaving money invested in the fund until it is needed.
I would be against statutory withdrawal limits, but incentives other than personal responsibility would be a good thing.
Perhaps a blend of the 2 would be appropriate, with a known irrevocably fixed, but low rate of income tax on pension payments that future governments could not dick about with combined with lower up-front tax relief. One of the uncertainties of the present system is that pension savers could end up paying more tax than is saved on contributions, although up to now that has not happened. Something like 10% tax relief on contributions (regardless of actual income), 10% tax on withdrawals (regardless of other income) plus 25% tax free sums as encouragement not to draw too much.
Why quote the gross cost of pension tax relief other than as a smoke screen? Why not then give the net cost after subtracting, 1) tax paid by those in retirement on income from pensions, 2) means tested benefits saved because of this income? Why not also examine how much of this “cost” can’t really be counted as a cost because people wouldn’t just blindly pay tax on this income if denied the option of putting it into a pension?
Games are being played so we all need to repond to the green paper.
@Naeclue: “that future governments could not dick about with”. No parliament can bind a successor – that’s the meaning of parliamentary sovereignty (a commitment to the principle of which is in large part why we don’t have a written constitution). You’d have to be enormously optimistic, to put it charitably, to think that every government in future will refrain from raiding our burgeoning pension pots on the grounds that one of their predecessors decades ago taxed the money on the way in. So the main drawback to the proposed reform is political risk, in my view. Admittedly this applies to ISAs too, and probably when there’s a critical mass of sufficiently large ISA holdings we’ll start to hear murmurings about taxing those.
@Tyro, there is no reason why pension savers could not have a contractual agreement with the government. They enter into commercial contracts all the time and they issue 50+ year gilts covered by contracts. They could default and break any contract, including gilts, but at least with a contract there is a chance of redress through the courts. UK governments are very reluctant to break commercial contracts because our independent judiciary will quite happily rule against them and award compensation if the government oversteps the mark.
If a new pension scheme was fair and affordable from the start, I can see no reason why it should not be backed by a contract of some sort. It is entirely rational for pension savers not to trust future governments, so a legal contract seems to me to be a sensible way of guaranteeing savers rights.
@investor
Re. Dividends tax change
Just to be clear my wife and I also have our own business
So I’m saying the dividend tax current changes are fair enough from the position of personally bearing the brunt of them
(increasing inheritance tax bands is obviously just plain evil)
Having been an employee for some years I have a keen appreciation of how (historically) better treated the self employed have been
My tax advice to you is to get married 🙂
@Neverland — Fair enough, always creditable when someone takes the detached view. As for getting married, I’ve missed those many boats I think! (Marriage is one hurdle, the fear of a ruinous divorce is the other! Maybe I’ve never fallen for a sufficiently independently wealthy gal… 😉 )
What will be the taxation situation of dividends received by a company instead of an individual?
At the moment there is no additional tax liability for UK dividends received by a company.
Re: Dividend Tax Change
Many thanks for your excellent article. I have only just found this website…… better late than never. Anyway it is now bookmarked and one which I’ll be coming back to again and again.
I also wish I had the foresight to use the annual ISA/PEP allowance. There was a period of several years when the stockbroker’s charges for using the ISA/PEP wrapper was higher than the 10% dividend tax that I could (at the time) reclaim so I didn’t bother. Bad mistake as it now turns out. At least my wife and I have used the full allowance for the last 7 or 8 years so the amount sheltered starts to mount up.
It has been apparent that the low taxation of dividends was an anomaly which was bound to be looked at sooner or later so I am not altogether surprised but this does leave a bit of a bad taste in the mouth as it is most certainly not an incentive to save the significant amounts which are needed if anyone wants to generate income in retirement, so as to reduce the burden on the state.
My question relates to the grossing up of dividend income for a tax return. Currently the notional 10% tax credit is added to the net dividend and this figure is used to determine income received. If this tax credit is to be removed, does the dividend received count as a gross amount for tax purposes ?
If this is the case it (slightly) mitigates the new 7.5% and 32.5% bands as it means that the amount of dividend income that an individual can earn before they reach the higher rate band increases significantly.
Incidentally, isn’t the higher rate applicable to dividends currently 22.5% rather than the 25% that you quote ?
Many thanks again and apologies if these questions have been answered before.
@ Failed Alchemist
Welcome. Your use (erroneous) of the term “net dividend” prompts me to point you at @Topman post 29 here above, where you may find the link containing examples useful.
This goes a long way to equalise the income tax paid by pensioners (using SIPPs as we will mostly do in the future) to employees paying income tax and NI now that I think about it
I guess the best thing for a pensioner using a SIPP to consider is to think about how to use their £10,000 a year of exempt capital gains to generate a tax free income
Morning all… some good clear worked examples of the extra taxes likely for directors here at this website…
http://jf-financial.co.uk/2015/07/09/new-dividend-tax-from-april-2016/
Just wondering if you know whether the national insurance benefits will remain in a low income and dividend situation (as in not needing to pay any), otherwise the monetary benefit of going down the limited company route could be outweighed by the accountancy cost due to currently doing my own bookkeeping and self assessment asca sole trader.
I have the Vanguard UK FTSE ETF via Hargreaves Lansdown. Its domicled abroad in Ireland. Should I expect HL to be passing me dividend statements with the tax credit details to show the IR, like I get for my UK shares owned directly, or is there some funny business because its HL/ETF/abroad? At the moment they just record it as a foreign credit into a cash account.
I have no further liability at resent, but from April 16 won’t there need to be a papertrail against the £5000 allowance?
The “dividend tax” applies to UK dividends.
So I wonder how this will impact on offshore investments held outside ISA and SIPP, for example NCYF and HFEL both long established ITs based in the Channel Islands up to now paying dividends gross with no more UK tax to pay for a BRT (as many have said “it’s complicated”).
The cynic in me says they will now be taxed at 7.5% for a BRT, I can’t find any guidance anywhere. Suspect that is because we have a DOH! moment.
Anyone have a definitive answer?
I asked HL and they confirmed that the fund will start paying tax if over the £5k annual allowance AND THEY WOULD PAY HMRC DIRECTLY. But with dividends paid with different frequencies, people having more than one broker, directly owning shares and being able to offset against personal allowances, this direct payment sounds like it would open a can of worms.
Surely payment gross with a paper trail so tax could be paid through a self assessment form would be much more sensible? Or a declaration form that you don’t pay tax, as can be done for cash accounts paying interest.
I don’t recall authorizing HL to do that? Spreading holdings amongst multiple brokers would seem to be a good way to avoid an awful lot of complexity.
Hi, thanks for this article.
I am a little confused! I have a limited company currently paying myself a nominal salary plus a dividend. I don’t understand your comments re isa’s. Can the company pay straight into a personal isa for me without that dividend being taxed? Would I not need to pay myself the dividend with the necessary tax on that and then personally put it into an Isa?
many thanks for any help!
@sally — No, you can only pay tax into the ISA from your own post-taxed earnings (or cash you get from somewhere else, such as an inheritance or an asset sale or what have you). Not sure where the confusion is coming from, but if you can highlight he offending lines I can try to revamp. 🙂
(Perhaps the confusion is because dividends from limited companies and dividends from equities are treated the same under the tax system — but you can’t hold a limited company in an ISA?!)
Do you know how are dividends taxed in respect to the starting savings rate?
For example, if you had a £12,000 salary, + £2000 interests, +£5000 dividends. Would the £2000 interests be taxed at the starting rate of 10% (before the dividends are taxed), or will they go after, in which case the interest would be the basic rate of 20%?
Hi…. glad I stumbled across this site looks excellent! I am still confused and it is driving me to distraction. I think I understand all the tax thresholds but am still perplexed by your comment that the “implicit” tax credit remains and how one factors this in when deciding how much of one’s dividends to set aside for the tax man. I understood how it worked before: add the tax credit to dividend amount that has arrived in my account to work out gross dividend, then calculate the tax on the gross dividend at the appropriate rate, then subtract the tax credit from the result and set aside the resulting number for the end of the tax year…. simples. But what now, my understanding is that the tax credit no longer exists and the new rate of tax on divs in the higher band is 32.5%. So I assume I just take the amount of dividend that arrives in my account and multiply by 32.5% to see how much I need to set aside…. or do I? In one of your answers you mention 25% effective rate.. which I don’t understand.? Help? For simplicity lets just say I’ve got a £30,000 dividend that hits my account and I know it is subject to the higher rate…. what do I set aside?
The reason I have become confused is that I looked at the age concern online calculator and they seem to apply 32.5% to the grossed up dividend (dividend received / 0.9) and then subtract the “implicit” tax credit from the result…..which I thought was the “old” way. Can you clarify on the example £30,000 dividend arriving in my account subject to higher rate please before my head explodes? Many thanks !
The age concern online calculator that I mentioned:
http://www.ageuk.org.uk/money-matters/income-and-tax/tax-calculator/?stp=1
@Paul — I think the confusion may be one of timing. To be clear the tax regime *is* changing, but it doesn’t begin until the new tax year in April. So it’s old rules until April 5, new rules from April 6th onwards. 🙂
Perhaps this Government fact sheet will help:
https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet
Thanks for the article!
I think you’ve answered it in reply to Sally “but you can’t hold a limited company in an ISA?!” but for clarity, what is stopping the director of a close LTD company from putting his £1 share in an ISA and taking the dividend income tax free?
@Richard You can only hold shares listed on a recognised exchange in an ISA and you can’t transfer assets into an ISA, so you’d have to sell it on the open market and buy it back in the ISA wrapper.
Which date is the important one for deciding in which tax year the tax should be paid?
If a company has these dividend-related dates…
Ex-dividend date: March 28th 2016
Record date: April 4th 2016
Payment date: April 11th 2016
… will tax be due in tax year 2015/16 or tax year 2016/17? (Assuming tax year starts on April 6th.)
Assuming you’re talking about dividends from public listed companies Charlie, you’re liable for tax when you receive the dividend payment, so in your example the taxable event is 11 April, and you’d include it in your 2016/17 tax return.
I have pension income totalling about £2k below the level at which I’d pay 40% tax, and also have a small income from various self-employed activities I carry out. My wife has transferred £1o6o ofher personal tax allowance to me, but I understand that if my total income is such that I go into the 40% tax band I’ll immediately lose all of the £1060 tax allowance from my wife. Would it make sense to set up a limited company within which to conduct my self-employed activities? In other words, could I then withdraw upto £5k dividends per annum tax free without any adverse implications for the £1060 transferred tax allowance?
In order to take advantage of the new £5,000 dividend nil rate band for both me and my spouse, I would like to transfer to my spouse’s trading account, as a gift, some of the holdings in my own trading account. I am thinking to transfer shares in Vanguard FTSE U.K. All Share Index A. The income version of this fund will next pay a dividend at 31 December 2016. My accumulation version has this dividend reinvested. What I want to know is: what do I need to do to be sure that the tax on the dividend is owed by my partner, rather than me. Does it make any difference whether I transfer the fund to his account early in the year, say 10 April 2016, or later in the year, say at 10 November 2016?
I am new to investing in the UK and have not yet seen how a UK tax reporting statement from my platform will look, so I do not yet understand how this works – if one owns shares in an accumulation shares of a fund for X% of a tax year, does that mean that one owes tax on X% of the annual dividend, or is it the case that the person who owns the shares at a certain point in the year (say when the income version goes ex-dividend) owes the tax on the entire dividend for the entire year? I hope you understand the question I am asking.
@Richard — I’m not sure of the answer to your question, but perhaps another reader might be able to help. In the meantime you might find these articles helpful:
http://monevator.com/accumulation-funds-dividends/
http://monevator.com/income-tax-on-accumulation-unit/
I think I might have found the answer to my question about transferring accumulation units to a partner. There will be an equalization payment, as explained below. So if I want the maximum amount of dividend to be charged to my spouse’s tax bill, I should make the transfer of shares as early as possible. I would be grateful if any other reader could comment.
https://www.oldmutualwealth.co.uk/globalassets/documents/literature-library/platform/collective-retirement-account/omw_pdf6600_a_guide_to_your_tax_voucher.pdf
Within a unit trust or OEIC, income is received from the fund’s underlying investments over a period of time. It accumulates within the fund until it is paid out to investors on the distribution date either as dividends or interest – see Income distributions explained overleaf. Units that are purchased part way through a distribution period are therefore only entitled to the income that has accumulated from the date of purchase. However, the same amount of income per unit is paid to all investors, regardless of the length of time they have held their units before the distribution date provided the investor holds units on the ex-dividend (or ‘XD’) date. In this situation, the income paid for these units is composed of two elements. The income that has accumulated during the distribution period before the units were purchased is known as equalisation; the balance of the payment is income that has built up after the date of purchase. The equalisation payment is not part of the income distribution. Effectively, it is a return of part of the investor’s capital and is therefore not subject to income tax. In addition, because it is a return of capital, for CGT purposes the equalisation payment should be deducted from the cost of the units when calculating any gains. Please refer to your financial adviser if you have any questions regarding equalisation and CGT. It is important to remember that equalisation is only included in the first distribution received following the purchase of a unit trust or OEIC. All subsequent distributions will be potentially taxable in their entirety
I presume that with the new dividend allowance, that dividends in accumulation funds are still worth tracking (as per http://monevator.com/accumulation-funds-dividends/) as it might push you over the limit when added to more visible dividends… and even if you are confident that you are under the limit that the figure could be used to reduce capital gains liability for future sales of the fund.
Sorry if this question has already been answered: I have about £12000 income from share dividends (outside of ISA) and no other income. I believe that I will not have to pay tax on the dividends as they will be covered by my Personal allowance of £11000 and dividend allowance of £5000, however, will I still be required to submit a tax return?
@Lin — I must stress that I’m not a financial adviser and can’t give you tax advice. However from my reading of the relevant pages at HMRC, it looks like you will need to fill in a tax return unfortunately, as your investment income is over £10,000.
See: https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return
It doesn’t say “your taxable income” which is why I think you need to fill in the form. But others may know better!
Am I odd in finding it very confusing that the 5k allowance is added on at all when working out what remaining tax is to be paid on dividend income
i.e. in the example matey earns 40k, gets 9k in unsheltered divis
if theres a 5k allowance then 9-5 is 4k. So just add the 4k on to his 40k earnings and see where it goes, a few k still in the basic rate and a few in the higher rate
it seems counterintuitive to ‘add’ the 5k allowance onto the 40k then work out where the remaining 4k sits, i.e. all in the higher rate
this point confuses me every single time i think about how the new dividend tax works (and of course it means you always pay more tax)
man – what i’ve written makes no sense, does anyone understand what i’m getting at. tax is so taxing it can’t really adequately be described using natural language.
My ongoing trials and tribulations have led me to bastardize the following quote..
“There is a theory which states that if ever anyone discovers exactly how Tax works and why, it will instantly disappear and be replaced by something even more bizarre and inexplicable.
There is another theory which states that this has already happened.”
― Douglas Adams, The Restaurant at the End of the Universe
Rhino, I thought the same as you, and was surprised. That comes from Example 6 on the HMRC website.
I think it’s a bit poor to utilize the dividend allowance for a bit of the lower rate band and some of the higher rate band. I’d have preferred you could use it for the whole of the higher rate band. I suppose the earner in example 6 should have ‘earned’ another 3K of income to utilize the 5K allowance for the whole of his 40% income.
I’m sure other people will come unstuck on this.
@TheRhino — No, it’s not just you, I think it’s pretty confusing for anyone who doesn’t work out taxes as their day job. 🙁
Follow the link in my article to the factsheet for more worked examples.
@TheRhino – The reason they do it this way is because they want to use the total income figure [inclusive of the £5k dividend amount, which itself accrues nil tax] to determine other things, such as the loss of child allowance above £50k, loss of personal allowance above £100k, and (as you note), whether any remaining taxed dividends are to be taxed at 7.5%, 32.5% or 38.1%, and also whether your tax free savings interest allowance is £1000, £500 or nil. Thus it is still possible that the addition of £5000 dividends income might push your total income from £100K to £105K, causing a loss of £2500 from the personal allowance and an effective increase in tax bill of £1000.
I have ASL investment trust inside an isa but I WEB take 10% tax off the dividened i recieve all within and isa!. i asked them about this and they said it was correct, is this correct anyone? i thought no tax was taken from divs inside an isa. are investemnt trusts different?
With regards to what TI is disscusing above ,Im a small limited company and due to this new div tax outside of an isa im reverting back to self employed status . i was on the cusp of doing so anyway and this was the final nail in the coffin!!
Good article. The old system was confusing and the new system is confusing in a different way.
Osborne was definitely after company directors, the big taxable share portfolios are just collateral damage.
The effective allowance under the old system was even larger than the £32K you mention, because any pension contributions you made increased your 20% tax band, which meant you could receive the equivalent amount in dividends tax-free on top of the £32K..
@Dawn I rejoiced at deleting all the old 10% tax issues from this blog and comments — including previous queries by you 🙂 – as none of it applies under the new regime.
However I have just thought I may have been too hasty, given that people will still have one more year of tax returns to submit under the old system.
Sorry, I haven’t got the intellectual will left to explain the 10% tax credit nonsense again I’m afraid. I’ve mentally junked it! 🙂
However I can refer you to the article and PDF from the AIC.co.uk website that you were referred to last time, which may also help others with this final year of returns:
http://goo.gl/3eUUeL
http://goo.gl/9beU42
I strongly suspect your confusion is based around this, perhaps enhanced by clumsy terminology from your broker. But please can you discuss it with them not me! I’ve done over 10 years service trying to explain the totally confusing tax credit. I’m due a rest! 🙂
@Richard — You seem like you might be one of those rare souls with a truly innate understanding of the tax system. If you have five minutes and can think of a couple of paragraphs of explanation that might help that I should stick into my “how much tax will you pay?” section (around the sentence about how working it requires looking into your tax bands etc) then I’d be grateful. I made a stab at it but found myself starting to go into the weeds with personal tax allowances and so forth. I feel there must be a simple way to put it in 100-150 words (not explaining the whole system of course, but the gist in a way to make it easy to grasp) but I can’t find it.
Your reply to TheRhino comes very close, but I think it needs a bit of modification and I’d rather a native tax speaker had a bash if you do feel you can help!
@Richard – Yes – I felt that there would be a way of looking at it that would make sense, and you have nudged me a bit closer. I think what would cement it would be a nice diagram to illustrate the point. Something along the lines of a bar split into segments.
@The Investor – I am not a tax professional. My understanding of the tax system partly derives from playing around with HMRC’s online tool and watching how the tax numbers changes under various inputs, and then reverse-engineering the logic behind it. Unfortunately, this tool is not yet available for 2016-17, so I cannot do that yet for the new tax regime. I can have a go at writing something based on my understanding of HMRC’s published document. Where is your existing “how much tax will you pay?” section? I cannot find it.
Here is an attempt at explaining how tax is calculated. It is not possible to cover everything. I ignore, for example, child tax credit. I will have to think further about how to summarise what’s below in 150 words. That is quite a challenge you set. Given a greater word allowance I would say as follows.
Firstly, we must understand that there are various tax rates and allowances that depend on whether you are designated to be a basic, higher or additional rate taxpayer. Examples are the rate of capital gains tax (10% for basic rate, 20% for others), and the personal tax free savings allowance (£1000 for basic, £500 higher rate, and £0 for additional). So your first task is to figure out which of these you are. To do this you add up all your income, excepting capital gains. If this is no more than £43,000 you are a basic rate taxpayer. If it is more than £150,000 you are an additional rate taxpayer. Otherwise you are a higher rate taxpayer.
Next, I think it is helpful to imagine making a stack of all your income, in a special order. At the bottom of the stack is your wages. Next up is a layer of bank interest and other passive income (such as rental income), followed by a layer of UK dividends, and then a top layer of foreign dividends.
Suppose the total stack height is £X. Now find your personal allowance, denoted A.
* For people with X less than 100,000, A=11,000.
* For X more than 122,000, A=0.
* For X in the range from 100,001 to 122,000, A=11,000-(1/2)(X-100,000).
Think of your income stack as sitting alongside a second stack of “tax layers”, which we conveniently label as 0%, 20%, 40%, 45%. The heights of the layers are respectively, A, 32,000, 107,000, and then the top layer stretches to infinity. Almost all we need to do now is to apply to each £1 in our income stack the tax rate that lies at the same height in the tax layers stack. But there are a few adjustments.
If you are a basic rate taxpayer you should look at the bottom £1,000 of bank interest (if any) which sits above the nil rate band (i.e. above the 0% layer given by the personal allowance) (or bottom £500 such amount if you are a higher rate payer). Change the tax rate to 0% for these £s. The additional rate taxpayer makes no such adjustment.
Now look at dividend income. Similarly, as with interest, change to 0% the tax rate imposed against the bottom £5,000 of dividends which sit above the 0% layer. For any remaining dividends that sit at the same height as the 20%, 40% or 45% layer, change the tax rate to 7.5%, 32.5% or 38.1%, respectively. You may reduce the tax rate further if you have foreign tax credits to apply. (Notice that the £5,000 allowance is applied first against UK dividends because these lie lower in the stack than do foreign dividends.)
Finally, we have to figure capital gains tax. To do this we should add to the top of our income stack our (non-property) gains (after subtracting the £11,100 tax free capital gains allowance). Any that falls at the same height as the 20% income tax layer is taxed at 10%, while any above that is taxed at 20%.
Does this help at all?
@The Rhino – Your idea of bars split in segments is a good one. I just wrote a post in which I did something similarly, asking you to visualise two “stacks”. One is a stack of income, stacked up in a special order. The other is a stack of tax layers, of various heights. To figure tax we look at the tax rate that lies at the same height in its stack as does a £ in the income stack, multiply those and add up through the stacks, – but then make some adjustments.
@Richard – yes some sort of dual stack of layers was what started to materialize in my minds-eye as well.
Just finished reading superforecasting so am particularly aware that the group of people with an innate grasp of the tax regime are very likely not the same group of people who are tax professionals. its an awesome read, right up there with thinking fast and slow
@Richard — Your suggestion is really interesting, and I’m going to think about it more over the weekend. However as you say yourself, it’s more detailed than what I was looking for here. I just meant a short addition into the section sub-headed: “What tax will you pay on your UK dividends?” (Apologies for the confusion on the title — I am moderating comments via a phone today, with limited time/access, and didn’t recheck the post for the exact words I used.)
Your explanation goes bigger picture, which is perhaps what’s required to really do it justice? Maybe on reflection my initial inclination to leave out the calculation process here was correct.
Still, I’m sure people reading this post will find your comment helpful, and I may be able to include something of the visual elements when I update a future post on how tax in general is calculated.
Thanks for taking the time to reply!
Hi,
In the Dividend Tax Rates section, the “non-taxpayer” bit in the line “7.5% on dividend income within the basic rate band (and non-taxpayers)” confuses me. If someone has total income of £10k (or even £16k), all from dividends, surely they wouldn’t be liable for tax?
In general, there are sadly few examples for how all the new changes affect non-taxpayers. (For those of us lucky enough to have an on-shore tax haven, otherwise known as a non-salaried wife…)
And while I’m here, that HMRC guidance on who needs to submit a tax return is wonderful (not).
Point 2 – “you got £2,500 or more in untaxed income, eg … savings and investments”
Point 3 – “your savings or investment income was £10,000 or more before tax”
Er, is it just me, or do those two (adjacent) statements not quite line up, now that “all” savings/investments are paid gross?
@boardgamer – I believe you are correct. If someone has total income of £16,100k all from dividends, then the first £11,000 is covered by the personal allowance and the next £5000 is covered by the dividend allowance. So there is tax liability is on £100, at a rate of 7.5%. This is what one must conclude from Example 3, here: https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet#examples
@Richard @boardgamer — Hmm, that was my assumption at first too, but then just before posting I added the “and non-taxpayer” bit in consideration of the official tax band table in section 1, here:
https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed
I agree it seems to contradict Example 3!?
@Richard – thanks, that what I assumed was the case, but it’s great to see it spelt out clearly! (@Investor – I’ll ignore the “non-taxpayer” bit in the HMRC statement, as it doesn’t make sense!)
@boardgamer — Hmm, given Example 3 and how we all understand the rules, I’m inclined to agree, but I fear(ed) there’s something I’m missing. For now I’ve deleted the 7.5%/non-taxpayer bit from the article as I can’t justify it, even given HMRC’s own statement on another page.
@boardgamer – I think what the words “non-taxpayer” can be explained as follows. In prior tax years it was possible, if your income is small enough, to register with your bank to have interest paid gross. Such people were definitely called “non-taxpayers”.
From 2016-17 everyone has interest paid gross, but there is still a special 0% rate for the first £5,000 of savings interest, provided your non-savings interest is less than £5,000. People for whom this is true may be what they mean by “non-taxpayer’s”. Thus, I figure that someone with only £20,000 bank interest and £4,000 dividends will have no tax on interest because 20,000-11,000-5,000-5,000= -1,000, and they will have 7.5% on £3,000 of dividends. I am thinking here that with regard to interest they get both the £5,000 nil rate band, and the £5,000 personal savings allowance.
@Richard – while I’m grateful for the tax breaks introduced, I can’t help thinking they could have been made somewhat simpler. The current rules are a complete dogs dinner. Your examples are very useful. Thank-you!
@Investor – I wonder if the “non-taxpayer” statement could be related to how the dividend tax is going to be implemented. I can imagine brokers being told to deduct 7.5% tax from any dividend income greater than £5k, leaving non-taxpayers to reclaim this later from HMRC. Somewhat tenuous, but I can’t think of any other explanation.
i like Richard’s stack model. it’s quite similar to this MSE post by “polymaff”: http://forums.moneysavingexpert.com/showthread.php?p=70419925#9 (the latter also incorporates the 0% band for interest)
on Richard’s earlier query (post #76 – March 31, 2016 at 1:45 pm) about equalization:
1) i think (though i’m not certain) that equalization doesn’t apply when you transfer units to somebody else, only when you have units created/redeemed via the fund manager. (the old mutual document is presumably about the more common creation/redemption process.) similarly, i’ve seen it said that equalization doesn’t apply to ETFs when we buy/sell them second-hand via the stockmarket, though it might apply to institutions who are involved in creating/redeeming shares in ETFs. as with other shares bought second-hand, the entire dividend is taxable income of whoever holds the share on 1 specific date (the record date). i would imagine that the same applies when transferring units in a fund to somebody else.
2) if equalization did apply, that would not give you any extra taxable income, providing you transferred the units before the ex-dividend date. equalization for funds never attributes taxable income to you when you don’t own the units on the record date; it can only reduce the taxable income that is attributed to you when you do own units on the record date (but only recently acquired the units). this seems pretty illogical to me (and is unlike the accrued income scheme for gilts / corporate bonds, which “works both ways”), but there you go …
3) your broker/platform will hopefully provide tax certificates to confirm the tax position.
Richard: the numbers in your last post (#104 – April 15, 2016 at 4:51 pm) are wrong, because the personal savings allowance is £1k, not £5k. if all of your income is interest and dividends, then the first £17k of interest is tax-free, not as much as £20k.
@grey gym sock – yes, you are right. I momentarily confused the interest and dividend tax free amounts. So someone with only £20,000 bank interest and £6,000 dividends will pay 20% tax on
20,000-11,000-5,000-1,000= 3,000, and they will have 7.5% on £1,000 of dividends.
@Richard, I’m surprised that someone with a taxable income of £26k gets the £5k zero rate band for interest; I had assumed that that band would be reserved for people with smaller annual incomes. We live and learn. It certainly makes the taxation of earnings and pensions look fierce.
If i am a non UK tax resident but am the sole shareholder and director of a personal service company in the UK, will i pay any UK tax on the dividends that I draw? These will be subject to tax in my country of tax residence so am wondering if I will be taxed twice? Thanks
Assuming the 7.5% or 32.5% dividend tax is payable, is it recoverable against qualifying VCT purchases?
Hi,
I have a question. I have been left some shares in a will, however I’ve been told that I wont receive dividends as they have been allocated to someone else, even though I own the shares. I have the right to sell them, to someone else within the company, but I wont receive any money from them until then. How does this work? Presumably I wont be paying tax on them ( until sale ) as I don’t benefit from them, but I’ve just never heard of this before and ideally I would rather receive dividends on my shares than someone else. Any advice would be more than welcome, thank you.
1. If I purchase an ETF outside of an ISA – say for GBP 1000 and it increases in value to GBP 1500, then I presume that this comes under CGT and not ‘UK Tax-free Dividend Allowance’, so if I’m a UK resident and UK income earner, then I pay CGT, right ?
2. What if I sell the ETF and I’m a non-resident ?
I’m selling my property and plan to invest the capital to generate an additional income alongside a pension. It seems possible that dividends on the investments could take me into the higher rate bracket if the dividend yield is about 3%. I’m wondering if there are index funds that have predictably low dividends and are growth focussed, so I can maybe produce income partly from selling equity too, and use my capital gains allowance before I get into the higher rate region, and pay cgt on larger sums if I have to as it has a lower rate than the higher rate dividend tax.
Hi, apologies if this has been answered before, but was just having a think today (as having been unexpectedly hit with a much larger dividend than expected, resulting in the 5k allowance being used up and going 2k over) – my ISAs are full at the moment so they can’t be utilised and themselves have high growth/high div stocks in at the moment too.
Would it be feasable/practical to sell the day before the ex-div date (say 4.15pm) and then rebuy at 8am it goes ex div, (almost like timing the market in reverse) to miss the dividend payment, effectively ‘selling high and rebuying low’?
Net capital – the same (so not looking to ‘make money’) but it means that you get a double whammy of benefits – no dividends to tax, and create a capital loss which can increase your capital gains allowance.
Is my thinking right here, or am I missing something? Cheers!
Sorry, I made a mistake, I didn’t mean create a capital loss (me not thinking), but it would be the case that if rebought within 30 days that it would not trigger a capital gain? So effectively escaping any dividend tax for the small risk of being out of the market for 30minutes? Cheers!
The 5k allowance is now only a 2k allowance as of 6th april 2018
Apologies if this is covered in the comments above. I couldn’t find it from a quick search.
There appears to be a bit of a tax trap in the current dividend/income tax setup. I haven’t thought through all the criteria which determine when this happens, however one situation is when having (salary-like) income somewhere in the basic tax band (i.e. £12,500 to £50,000) and dividend income which takes the total income into the higher rate tax band or above (£50,000+). In this case, some of the non-dividend income will have a marginal rate of 57%, which is surprisingly high.
To illustrate this with an example, say you have a salary of £40,000 and unsheltered dividend income of £15,000. Then suppose your salary increases by £100 to £40,100. That extra £100 leads to an increase of £20 of income tax and £12 NIC. However, it also pushes another £100 of dividend income into the higher tax band, meaning another £32.50 of tax for that slice of dividend income. That’s slightly offset by the corresponding £100 of dividend income moving out of the basic band, saving £7.50. But overall, it’s an increase in tax of £20 + £12 + £32.50 – £7.50 = £57 on your £100 salary increase.
I suspect few people will find themselves in this situation. For one, you have to be fortunate enough for a large amount of dividend income (at least over the £2,000 allowance, I suspect) outside of tax shelters (or unfortunate, depending on how you look at that…).
However, someone approaching or at retirement with this kind of income may choose to work fewer days or choose a certain amount of pension drawdown, both taxed as non-dividend income, unless I’m missing something. And in both cases, this 57% tax trap (or 45% without NIC) could come into play and perhaps should have a bearing on the decision they make. I guess it’s always worth putting such plans into a tax calculator (e.g. https://www.itcontracting.com/calculators/limited-company-dividend-tax-calculator-2019-20/) to see the difference before executing them.
I think there are examples of this with incomes in different bands, e.g. inside the personal allowance taper, which make this even worse, but I suspect that will affect a vanishingly small number of people.
I’d be grateful for anyone pointing out errors in my thinking here.
This is really a timely reminder.
Could someone recommend a UK stocks & shares ISA with low Fx fees (other than IB)?
My partner insists on keeping some legacy US shares and should really move them into an ISA. With most platforms this would cost 2-3% (1-1.5% Fx fee for each transaction).
IB is great for low fees and choice, but with their labyrinthine system and poor customer service they aren’t for beginners.
Would appreciate some pointers on to how to calculate gains/losses on shares when dividends are re-invested.
I recently sold all my long term holding of a UK company’s shares. They were in a general account, rather than an ISA. The pattern of investment was a largish chunk at the beginning, followed by nothing other than automatic re-investment of the dividends through a DRIP scheme over the years. I took some profits on part of the holding a couple of years ago, which was less than the annual allowance.
Google seems to be very sparse when trying to find a worked example of how to work thing out, so would appreciate some guidance/pointers.
I did not know about US Witholding and pensions. Fascinating – off to research. Thank you for being so magnificently comprehensive – even when I think I am clued up, I learn stuff here!
p.s. @TI I don’t suppose you know anything about US MLPs? It’s horrible. The new CGT situation as of 1/1/23 is brutal, but even the dividend situation is confusing i.e. they take off a big chunk of withholding, but it is unclear to me if you can offset the tax paid there with tax payable here, as with Company dividends. I presume so, but any knowledge much appreciated!
Quick question:
The Vanguard LS funds go “ex div” on 1st April, but payment is on May 28th.
For dividend tax purposes, should we use the Ex Div date (ie. 2022-23) or the Payment Date (2023-4)
Fabulous blog by the way. It’s been my main source of financial education for the last 6 years.
You forgot to update the “Her Maj’s finest” bit!
I think it’s still the case that if the unsheltered dividends are within your personal allowance and you have no other income, you’re Ok up to about £12k?
I’ve noticed with Interactive Investor’s recent shift to a new shiny platform that they are unable to provide a downloadable file to excel of historical trades in order to calculate possible CGT liability. Pretty shoddy stuff. I can’t be the only one to have called them on this. Are the other mainstream brokers’ platforms able to this… Anyone?
@Vic #121 – HL and I believe iWeb have csv/xls export although I haven’t used the latter in a long while with 3 trades a year.
Agree you should alway use SIPPs and ISAs to wrap such assets, but it is reassuring to think that if you suddenly came into a windfall, such as from a property sale, then there is only 8.25% tax to pay (while you spend years Bed and ISAing it from a GIA) even if your total income is £50k per year.
Let us hope Labour don’t jack up that rate on top of the erosion of the dividend allowance to almost nothing.
I think you need to check if any ETFs are UK Reporting for them to qualify for the 8.25% tax vs regular 20%+ income tax. Most of the Irish domiciled dividend focussed ETFs should be ok from the ones I’ve looked at (e.g. iShares IUKD, Vanguard VHYL, State Street GBDV, WisdomTree EEI for anyone interested).
Then of course there are all the old school equity income investment trusts.
I can see such assets being more tempting than, say BTL property which is now taxed and regulated to such a degree that it makes little to no sense in a long property bear market, where a years net income can easily be wiped out on repairs or bad tenants.
So in summary, you could build up a portfolio across a combination of SIPP, ISA, £1000 cash interest allowance and dividend income where the average income tax on up to £50k of income was really, really low (single figure %) relative to “earned income”.
@SemiPassive — Unless I’m misunderstanding you, you’re conflating capital gains tax with taxes on dividends. 🙂 These tax regimes and allowances are different.
I think you are misunderstanding me. My understanding was dividends received from offshore domiciled non-UK Reporting equity ETFs were taxed as income at 20% or 40% (depending on your income). Nothing to do with Capital Gains Tax which is a whole other topic as you say.
@SemiPassive – I’m recovering from a hangover so who knows but you write:
“but it is reassuring to think that if you suddenly came into a windfall, such as from a property sale, then there is only 8.25% tax to pay (while you spend years Bed and ISAing it from a GIA) even if your total income is £50k per year.”
Above the Capital Gains tax-free allowance of £12,300, CGT on a property sale is charged at 18% for standard rate taxpayers and 28% for higher rate taxpayers.
OK, I see what you mean in that context but I was meaning the taxation on the income that the windfall money could provide when invested.
I wasn’t considering CGT on a (non primary residence) property sale, which in any case would have to be paid whatever you do with the money.
Look at it another way, if you’d sold your main residence to downsize there would be no CGT. And then invested that money in dividend stocks there would be only 8.25% tax to pay on divi income.
If you’d instead bought another property as a BTL then you’d be paying a minimum of 20% income tax.
Anyway, sorry I don’t want to add to your hangover. Go get a decent artisanal coffee and a posh bacon roll from the hipster cafe.
@BillD 120 It’s my belief that if you have no earned/pension/miscellaneous income, you can have up to £13570 dividends plus up to £6000 interest without paying any income tax, plus of course anything you get from an ISA.
That’s £12570 Personal Allowance, £1000 Dividend Allowance, £5000 Starting Rate for Savings, & £1000 Personal Savings Allowance.
You read my mind. Albeit it was the Italian deli and I subbed in arancini. 😉
I see what you’re saying now, that you could effectively pay 8.25% on the proceeds of the invested *windfall*.
Again remember (in case not clear, you probably realize this) that’s at the lowest rate of tax. Many Monevator-type readers on a halfway healthy salary they are going to be (perhaps bumped into) the higher-rate dividend tax bracket if they earn a few thousand or more in dividend income.
@Ecomiser 128 Good point on starting rate for savings, I had forgotten about that. So with the dividends and cash interest along with ISA dividend income one can get a decent amount without paying any tax. On top of that could also do several partial crystallisations of a SIPP taking only the tax free cash if needed.
Appreciate an evergreen article, but His Maj’s people, these days.
Interesting to see comments purely about investing in terms of ISA’s, Pensions, but the dividend rates are yet another nail in the coffin of what used to be called “Enterprise Britain” back in the say.
What is the point in teying to build a company anymore with your own money.
A salary costs you
Employer’s NI + Employee’s NI + Income Tax
Roughly for every £100 that clears, at high tax rate, just under £51.
For dividend at high tax rate that means
Corporation Tax + High Div Rate
Roughly for every £100 that means just under £50.
Yet, when I did economics a dividend was meant to be lower taxed to reflect the risk and encourage investment in companies. What’s more Jeremy Hunt knows that!
The article flagging up the reduction in tax-free thresholds on dividend income prompted me to take a look at whether I might be pushed into a higher tax bracket because of the level of dividend income from the funds and shares I hold outside an ISA.
I’m not a sophisticated or particularly active investor. Retired, with an occupational pension, I’m near the top of the basic-rate income tax bracket. I pay the full permitted amount into an ISA each year by monthly debit, and also the annual amount permitted into a SIPP – and can afford to continue to do so.
The funds and shares I hold outside these wrappers currently pay about £4k in dividends. So it looks as if I will fall foul of the reduction to £1000 and then £500 in the tax free allowance on dividend income.
A simple but obvious question to which I think I know the answer. My platform will allow me to transfer (or rather “bed-and-ISA”) these ‘outside shares’ into my ISA. But the value of those shares, when shifted into the ISA, count against the annual limit on the amount allowed to be invested in an ISA.
So…. to shift them into an ISA, now or in the next tax year, would I presume require me to cease or reduce the amount of ‘new’ money I could contribute into my ISA. Is it worth my doing this – ie shifting existing shares into an ISA instead of continuing to add new money?
@Br1an
Congrats on the huge DB pension – you’ll need to watch out for the LTA if you’re still contributing.
I’m with the interactive investor Platform and have recently Bed and ISa’d, and will do again in April – with II the amount bed and ISa’d is the subscription, so you’ll probably need to stop monthly payments to generate headroom. (Although your platform may be different – give them a call)
I also believe I can bed ans isa over £20k if the is sufficient cash in the isa already to cover the excess over £20k (this is important for me as the bid offer spread is tiny for B&I over the phone)
My plan is bed and isa until there is no Bed left!
I was filling in a tax return noticed that the £2,000 tax exemption on foreign dividends is in addition to the ever reducing tax exemption on UK dividends. As a passive investor, this means that holding an Irish domiciled ETF and a UK domiciled fund allows me to increase my dividend tax allowance by £2,000. At least this is the conclusion I reached when running the HMRC tax calculation at the end of doing the income tax return. I checked with the TaxCafe income tax manual and as far as I can see this is correct. Can anyone confirm this is right? If so next time you update this article it would be worth pointing it out.
What about dividends under Share Incentive Plans? Do they count as part of your dividend allowance?