How much tax do you pay on dividends

This article explains how much tax you will pay on your dividends for the 2018/19 tax year.

It has been written from the perspective of a UK limited company owner who extracts dividends from their own company.

This is often done with a combination of a low tax efficient salary with the balance in dividends, but for this article we are only looking at dividend taxation.

The first £2,000 of your dividends in the 2018/19 tax year are tax free due to something called the dividend allowance.

For the 2017/18 and 2016/17 tax year the tax free dividend allowance was £5,000, but this reduced to £2,000 for the 2018/19 tax year (from 6th April 2018).

Above this £2,000 of dividend income, your dividends will be taxed as follows for 2018/19:

  • If you have any un-used personal allowance this can be allocated against your dividend income – for 2018/19 the tax free personal allowance is £11,850
  • Any further dividends which are in the basic tax band (up to £46,350 of income) are taxed at 7.5%
  • Dividends in the higher tax band are taxed at 32.5% (this is for income between £46,350 and £150,000)
  • Dividends in the upper tax band (above £150,000) are taxed at 38.1%

 

How much tax do you pay on dividends

 

If you have other income to consider, such as employment income or rental income, then remember that dividends are taxed last in the order of taxation when it comes to the tax bands, so you need to factor in your other income first before you work out which tax band(s) your dividends sit in.

Lets look at a simple example of someone who’s only source of income for the 2018/19 tax year is £60,000 of dividend income, the dividend tax calculation would be as follows:

 

dividend tax calculation 1819

 

Please remember that dividends can only be paid out if there are sufficient distributable profits in your company to support the dividends.

Also bear in mind that the taxation on dividends is based on the personal tax year, as opposed to your companies accounting year – so for 2018/19 your dividend income is taxed based on how much dividend income you receive in the period 6th April 2018 to 5th April 2019.

This article has been kept purposely simple and we have based it on many typical common assumptions which may not apply to your individual circumstances, so we would always advise that your discuss your own dividend tax planning with an experienced accountant (like us!).