Paying Dividends?
Tax is now due on dividend incomes for many, with the allowance halved, says Paul Lewis.
More than a million people will have to pay tax on their dividend income for the first time this year. The dividend allowance – the amount under which no tax is due – was £2,000 in 2022/23, but was halved last year, and halved again to just £500 this year.
So even if your shares are worth just a few thousand pounds, tax may be due on the dividends this year. The average yield on shares in the biggest hundred listed companies (FTSE 100) is currently 3.5%. If you receive dividends from more than £14,300 of shares in an investment based on that then tax will be due. Some companies pay much higher dividends, though: telecoms firm BT has a prospective dividend yield of 6.1%, so around £8,200 of shares would generate an income above £500 and the excess will be taxable.
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It works like this. If you hold £20,000 of shares in a company that pays 4% in dividends, this year your income will be £800. Last year no tax was due as the tax-free dividend allowance was £1,000. But this year it’s only £500 so tax will be due on £300 – £26.25 for a basic rate taxpayer or £101.25 for higher rate taxpayers.
The rates of tax are 8.75% if you pay basic rate tax, 33.75% on higher rate, and 39.35% for top rate taxpayers. You must tell HMRC about your dividend income. If you already fill in a self-assessment form, it goes on that; otherwise call the tax helpline 0300 200 3300. Have your National Insurance number with you – and a cuppa, as callers had to wait 23 minutes on average last year. If you have earnings or a pension then your tax code will be reduced to collect the tax due on your dividends. Otherwise you’ll be sent a Simple Assessment after April 2025 showing the tax due and how to pay it.
You can avoid tax on dividends by holding your shares in an Isa, but you cannot just move them into one: they have to be sold and then repurchased by the Isa provider. If you sell them for more than £3,000 above the price you paid for them, Capital Gains Tax may be due on that profit.
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For more information, search gov.uk for “dividend tax”.
To read more of his advice, see radiotimesmoney.com QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. I cannot answer you personally, but I will reflect them in this column.