There are many different forms of income that can form part of a balanced financial portfolio and should you own shares in a company(s), dividend payments are just one such income.
Like all income structures however, dividend incomes are subject to taxation.
What is a Dividend Income?
If you own shares in a company, there a few ways in which you can earn – should your share value grow you can sell a proportion or the entirety of the shares, or equally if a company chooses to distribute profits to shareholders, you can receive a dividend payment.
Dividends can be an excellent and stable way to generate a regular income from your investments. But, as with any income you earn, you are subject to taxation. Dividend taxation however is subject to a lower than standard level of taxation than you would pay for say pensions or work-related incomes.
How Much Tax Will You Pay in the 2020-2021 Period?
During the 2020-2021 period you will not need to pay any tax on the first £2000 that you receive – this is what is known as the tax-free dividend allowance and is subject to a yearly review.
You will be liable to taxation based on any income accrued above this £2000 marker – anything above this will be liable to a tax and is knows as a ‘marginal tax rate’ or ‘tax band’. It is also possible to avoid tax on your investment income if you hold your shares or funds in a stocks and shares ISA. If your only income is from investments, then you can also use your tax-free personal allowance before you start paying tax on dividends.
In general, however you could earn another £12500 on top of your £2000 dividend free personal allowance.
Working Out Your Tax Dividends
Atop your personal allowance of £2000, you will pay the following tax rate on dividends based upon your income:
- Personal Allowance – 0% if your income falls below £12,500
- Basic Rate – 7.5% rate based upon an income of £12,500 – £50,000
- Higher Rate – 32.5% is applicable between £50,000 – £150,000
- Additional rate – 38.1% is only applicable for incomes above £150,000
Dividends from shares and funds however aren’t guaranteed, and the amount you receive will depend on how much profit the companies you are investing in make, and how much they pass on to shareholders.
Other Taxes that May Impact Your Dividend Taxation Rates
As and when you come to sell your shares, you could be liable to pay tax on any profits that you make – this would be Capital Gains tax (CGT).
Much like dividends, you also have an annual tax-free allowance on capital gains. In 2020-21 this is £12,300, but if the profit you make when selling your shares is below this amount, you won’t have to pay tax.