Dividends can be a great way to earn supplementary money to your normal salary and, on top of this, they can also be highly tax efficient when compared with Income Taxable earnings.
But what is dividend income and when should you pay tax on it?
Essentially, when a company earns a profit, it can choose to redistribute a portion of these earnings to its shareholders in the form of dividends.
These payments can come from a variety of sources, including stocks, mutual funds, and investment trusts, and can be a great key component of personal finance for investors seeking income or growth through reinvestment.
However, HM Revenue & Customs (HMRC) is explicit in its requirement for individuals to report this form of income and has been cracking down on non-compliance recently.
In fact, in a recent letter campaign, they have been warning directors and company owners of their obligations.
In these letters, the business owners have been given the option to disclose information on any dividends that have not been declared or inform HMRC if they believe there is nothing more to declare.
Failure to do so (or providing inaccurate information) might lead to significant penalties, including fines and interest charges on the tax owed.
Below, we explore two scenarios. One in which you file your taxes via Self-Assessment and one in which your employer handles your Income Tax.
In both cases, there are specific requirements which you must adhere to in order to stay compliant with the law and avoid nasty repercussions from the taxman.
Who pays Dividend Tax and how much?
The good news is that if you earn less than £1,000 from your dividends, you don’t have to pay tax. (This threshold will fall to £500 in April 2024).
Above this threshold, however, your tax obligations are based on your Income Tax rates.
- Basic rate = 8.75 per cent
- Higher rate = 33.75 per cent
- Additional rate = 39.35 per cent
I report my taxes via Self-Assessment
For those who file their taxes through Self-Assessment, declaring dividend income is a straightforward process.
HMRC provides a step-by-step guide on how to include this information in your tax returns.
It’s crucial to be mindful of the deadline for submitting your tax return which will be 31 January 2025.
Keeping accurate and comprehensive records of the dividend income you have received throughout the tax year is essential for this and ensures you can report your income accurately and efficiently.
I don’t file via Self-Assessment
Not everyone in the UK is required to file a Self-Assessment tax return.
Individuals whose taxes are usually deducted at source, such as employees under PAYE, might not typically need to file.
However, if you receive dividend income and don’t usually complete a tax return, you still have obligations to meet.
You can declare this income by contacting HMRC directly to adjust your tax code or inform them about your additional income.
In some cases, receiving dividend income might necessitate filing a Self-Assessment tax return, especially if the amount received exceeds your tax-free allowance.
If this is the case, we suggest that you get in touch with an accountant at your earliest convenience.
I forgot to declare my dividend income, what should I do?
If you’ve omitted dividend income from your tax declarations in the past, it’s crucial to rectify this situation promptly to avoid possible legal/regulatory action.
HMRC offers a voluntary disclosure facility to encourage individuals to come forward and regularise their tax affairs.
By taking proactive steps to disclose undeclared income, you can minimise potential penalties and interest charges.
This process involves contacting HMRC, explaining the oversight, and following their guidance to pay any tax owed.
Potential issues with undeclared dividend income and how to avoid them
Maintaining compliance with tax obligations requires diligence and organisation.
Regularly updating and reviewing your investment portfolio and records can help you stay on top of dividend income declarations.
Consulting with a tax adviser can also ensure your tax returns are accurate and comprehensive.
To speak to a tax adviser, please get in touch with one of our team.