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F<\/span>or years now, dividend tax rates<\/strong> have been increasing. In addition investors have been hit with a massive reduction in the already miserly tax-free dividend allowance<\/strong>.<\/p>\n Let\u2019s run through the current dividend tax rates and allowances. We\u2019ll then consider how we got here, and what you can do about it.<\/p>\n The rate of tax you\u2019ll pay on your dividends depends on your income tax band.<\/p>\n UK dividend tax rates are currently:<\/p>\n But note that depending on your total earnings \u2013 and where it comes from \u2013 you could pay tax at more than one rate on your income.<\/p>\n 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.<\/p>\n 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.<\/p>\n I hope you\u2019re keeping notes at the back.<\/p>\n We\u2019re talking about dividends paid<\/strong> outside of tax shelters<\/strong>. Dividends earned within ISAs and pensions are ignored with respect to tax. Adding up your dividends for your tax return? Don\u2019t include dividends paid in ISAs or pensions. Forget about them when it comes to tax. (Enjoy them for getting rich.)<\/p>\n As of 6 April 2024, the annual<\/strong> tax-free dividend allowance was halved to just \u00a3500<\/strong>.<\/p>\n 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.<\/p>\n Like other tax allowances such as the personal allowance<\/a> for income tax, the dividend allowance runs over the tax year<\/a>. (From 6 April to 5 April the next year).<\/p>\n The \u00a3500 dividend allowance means you only automatically escape dividend tax on the first \u00a3500 of dividend income.<\/p>\n This level of dividend is tax-free, irrespective of how much non-dividend income you earn and your tax bracket.<\/p>\n (Incidentally, if you heard that these allowances used to be much more generous, you\u2019re right. They have been slashed over the past few years. More on that below.)<\/p>\n Dividends<\/a> are cash payouts made by companies:<\/p>\n Dividend tax only comes into the picture on dividends you receive outside of a tax shelter.<\/p>\n Using ISAs<\/a> and pensions<\/strong> is key to shielding your income-generating assets from tax<\/a> for the long-term.<\/p>\n If your dividend income exceeds the tax-free dividend allowance, you\u2019ll pay tax on the excess.<\/p>\n This liability must be declared and paid through your annual self-assessment tax return<\/a>.<\/p>\n For example, if you received \u00a36,000 in dividends, then tax is potentially charged on \u00a35,500 of it. (\u00a36,000 minus the \u00a3500 tax-free dividend allowance).<\/p>\n As we said, the rate you\u2019ll pay depends on which tax bracket<\/a> your dividend income falls into.<\/p>\n 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.<\/p>\n To avoid taxes reducing your returns<\/a> you should invest within ISAs or pensions.<\/p>\n If you own funds outside of tax shelters, you could also owe tax on reinvested dividends<\/a>.<\/p>\n Choosing accumulation funds<\/a> doesn\u2019t spare you the tax rod \u2013 unless they\u2019re safely bunkered in your tax shelters.<\/p>\n If you\u2019re 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\u2019s finest in the UK.<\/p>\n You may<\/em> even pay this withholding tax on foreign dividends held within an ISA or pension.<\/p>\n 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.<\/p>\n Your broker should<\/em> take care of this for you.<\/p>\n Some territories do not charge withholding tax on dividends received in a UK pension. The US is the most notable one. (This doesn\u2019t apply to ISAs. Choose where you shelter your US shares accordingly.)<\/p>\n Again, make sure<\/strong> your platform is paying you any US dividends in your pension without any tax having been charged.<\/p>\n It can all get a bit fiddly. See our article on withholding tax<\/a>.<\/p>\n Then-chancellor George Osborne revamped UK dividend taxation in the Summer Budget of 2015.<\/p>\n 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.<\/p>\n Osborne also said the changes enabled him to reduce the rate of corporation tax.<\/p>\n But whatever his intentions, as we\u2019ve seen today\u2019s regime applies equally to dividends received from ordinary shares.<\/p>\n Even worse, the initially fairly-generous dividend allowance of \u00a35,000 \u2013 designed to avoid small shareholders being taxed on legacy dividend-paying portfolios \u2013 is now just \u00a3500.<\/p>\n Admittedly, most small investors have not been hit by the changes. That\u2019s because most of us hold our shares within ISAs and pensions these days.<\/p>\n However there are exceptions.<\/p>\n Small business owners paid a dividend by their limited companies now pay more tax. Salary-sized dividends chew straight through today\u2019s tiny dividend allowance.<\/p>\n There also exists a dwindling cohort of older investors who built up a big portfolio of income shares outside<\/em> of ISAs and pensions. They\u2019re paying far more tax too.<\/p>\n For years I urged<\/a> these older dividend investors to move as much money as possible into ISAs. They could do this by defusing gains<\/a> to fund their ISAs, for instance.<\/p>\n The ISA allowance is a use-it-or-lose-it affair. You must build up your total capacity<\/a> over many years.<\/p>\n Yet inexplicably to me<\/strong>, some argued \u2013 even in the Monevator<\/em> comments<\/a> \u2013 that there was no point.<\/p>\n Dividends were not taxed until you hit the higher-rate band, they said. So why bother?<\/p>\n 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 of the competition as to how to divvy up your annual ISA allowance.<\/p>\n But the truth is taxes on dividends were always liable to change. And eventually they did.<\/p>\n At that point, the people who had declined to move some or all of their portfolios into ISAs \u2013 just to save a few quid \u2013 were hit with large tax bills.<\/p>\n I hate to say I told you so. (Truly \u2013 I write a blog to help people.)<\/p>\n ISA sheltering costs nothing<\/strong>. Even back then there was at most a trivial cost difference with an ISA versus a general account<\/a>. Nowadays there\u2019s usually none.<\/p>\n Get any non-sheltered portfolios into an ISA (and\/or a SIPP<\/a>) as soon as possible, if you can. Not just to avoid dividend tax, but also to shelter from capital gains taxes<\/a> and other future regulatory changes.<\/p>\n Note: I\u2019ve removed talk about the old way UK dividends were taxed in the reader comments to reduce confusion. We have to let go! But the discussion may still refer to old (or incorrect) dividend tax rates and allowances. Please check the dates if unsure.Dividend tax rates and allowances<\/h4>\n
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The tax-free dividend allowance 2024 to 2025 and beyond<\/h4>\n
What are dividends?<\/h3>\n
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What tax rate will you pay on your UK dividends?<\/h4>\n
Beware of being bounced into a higher tax band<\/h4>\n
Watch out for withholding tax on dividends<\/h4>\n
Why was the old dividend tax system changed?<\/h3>\n
Always use your tax shelters<\/h3>\n
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