Note: the government has announced that from April 2022, tax on dividend income will increase by 1.25%.
The HMRC dividend allowance means that you can receive a limited amount of dividends tax-free. Above that limit, special rates of tax apply. Dividends on any shares held in an ISA are also tax-free
The tax treatment of dividends has changed several times in recent years, so it’s important to make sure you understand the current rules.
Tax-free dividend allowance
The dividend allowance for the tax year 2021/22 is £2,000. This is a significant reduction from earlier years.
For up to £2,000 of dividend income, there is no tax to pay - regardless of how much other income you have.
Dividend tax rates
For higher amounts of dividends, the rate of tax depends on your total income - including other, non-dividend income:
- the first £2,000 of dividend income is still tax-free;
- any extra dividend income within the basic rate band of up to £50,000 for someone with a personal allowance of £12,500 is taxed at 7.5%;
- for dividends that fall within the higher rate band (up to £150,000), the rate is 32.5%;
- for dividends in the additional rate band, the rate is 38.1%.
Planned rise in dividend tax
From April 2022, tax on dividend income will increase by 1.25%. So, after the £2,000 allowance, those in the basic rate band for Income Tax will pay 8.75% on dividend payments (currently 7.5%), while those in the higher rate band will pay 33.75% (currently 32.5%) and those in the additional rate will pay 39.35% (currently 38.1%).
GoSimpleTax makes your self assessment tax return quick and easy, helping you figure out which expenses and allowances you can claim.
Declaring dividend income
If you already complete a self assessment tax return, you must include dividends in this. You need to declare the total dividends received, even if the amount is less than the dividend allowance.
If you do not normally complete a self assessment tax return:
- if your total dividends are less than £10,000, contact the HMRC income tax helpline (0300 200 3300);
- if your total dividends are more than £10,000, you must register for self assessment and file a tax return.
You do not need to declare (or pay tax on) any dividends from ISAs.
Dividend allowances for previous years
The dividend allowance for 2016/17 and 2017/18 was £5,000.
For 2015/16 and earlier years, there was no dividend allowance. But the rates of tax payable on dividend income were lower than the current rates.
Content reviewed by Mike Parkes, technical director, GoSimple Software