Home Money How dividend tax works: the rates you pay and how to reduce it

How dividend tax works: the rates you pay and how to reduce it

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A dividend is basically a reward for owning shares and you can receive it in cash or reinvest it in more shares.

A dividend is basically a reward for owning shares and you can receive it in cash or reinvest it in more shares.

Many investors depend on income from dividends. It can generate big profits, especially if you keep reinvesting them in more stocks.

A dividend is basically a reward for owning shares, which is paid according to the number of particular shares you own.

This payment will be made at intervals chosen by the company, such as monthly, quarterly, semi-annual or annually, and you can choose to receive it in cash or reinvest it in more shares.

However, the Government inevitably wants its share of this wealth, and in recent years has cut allocations and taken increasing amounts of dividend tax from investors.

Wealthier investors and small business owners, who often choose to pay themselves through dividends, are hardest hit by the dividend tax.

But the increasingly stingy regime means it is also taking an increasing toll on low-income individual shareholders who hold investments outside of Isas and pensions.

Below we discuss the rules and how to protect yourself from dividend tax.

How much is the dividend tax?

Tax-free allowance for dividend income reduced to £500 from April 2024, below £1,000 in the previous tax year.

If your dividend income is greater than your personal allowance (which also takes into account all your other taxable income) plus your tax-free dividend allowance, you will pay dividend tax in accordance with your income tax bracket.

Tax rates on dividends are currently 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers.

Rates increased from 7.5 percent, 32.5 percent and 38.1 percent as of April 2021.

As financial experts noted at the time, because the 1.25 percent increase was imposed across the board regardless of income tax bracket, this change fell most heavily on shareholders who were basic rate taxpayers.

Former chancellor Kwasi Kwarteng announced in his ill-fated autumn 2022 mini-budget that the 1.25 per cent rate rise would be reversed from April 2023, but Hunt quickly abandoned that idea again.

As for the dividend allocation, it was introduced at £5,000, but saw a drastic 60 per cent cut in 2018 and, as noted above, was reduced to just £500 in spring 2024.

How dividend tax works the rates you pay and how

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It is worth noting that the pre-April 2016 regime was more generous to lower income, or basic rate, taxpayers due to a ‘notional tax credit’ which effectively meant that they paid no taxes on dividends.

Meanwhile, under that old system, higher-rate taxpayers only paid a 25 percent dividend tax.

The £5,000 allowance was initially created to compensate people for missing out on this valuable benefit and was primarily aimed at personal investors.

The Government explains more about dividend tax on your website, including how to pay for it.

When you sell your shares, you may also have to pay tax – read our guide to capital gains tax here.

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Do you have any questions about taxes?

1713298850 284 How dividend tax works the rates you pay and how

Heather Rogers, founder and owner of Aston Accountancy, is a tax columnist for This is Money.

She can answer your questions about any tax topic: tax codes, estate tax, income tax, capital gains tax and much more.

You can write to Heather at taxquestions@thisismoney.co.uk.

How to protect yourself from dividend tax

Use your Isa allowance of up to £20,000 a year by switching your investments to the tax-free wrapper of stocks and shares Isa.

This can be done by selling your investments and buying them back in a process known as a Bed & Isa.

Couples can also transfer assets between them tax-free to make the most of this.

Financial experts suggest you might consider prioritizing investments that pay high dividends when deciding which one to switch to your Isa.

However, if you keep growth shares out of your Isa, you also need to consider capital gains tax. You may want to seek professional advice on the best way to handle this. Capital gains tax was reduced from £12,300 to £6,000 in April 2023, and again to £3,000 from April 2024.

You can also invest more through your pension, where contributions are topped up by Government tax relief and your investments can grow tax-free.

But in a pension your money is locked in until age 55, reaching age 57 in 2028, and any withdrawals above a 25 per cent tax-free lump sum are subject to income tax.

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Compare the best DIY investment platforms and stocks and shares Isas

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Investing online is simple, affordable and you can do it from your computer, tablet or phone at a time and place that suits you.

When it comes to choosing a DIY investment platform, stocks and shares Isa or general investment account, the range of options can seem overwhelming.

Each provider has a slightly different offering, charging more or less to trade or hold shares and giving access to a different range of shares, funds and investment trusts.

When assessing which one is best for you, it is important to consider the service it offers, along with any administration and dealing charges, plus any other additional costs.

To help you compare the best investment accounts, we’ve looked at the facts and put together a complete guide to choosing the best and cheapest investment account for you.

We highlight the main players in the table below, but we recommend that you do your own research and consider the points in our full guide linked here.

>> This is Money’s complete guide to the best investment platforms and Isas

The platforms shown below are independently selected by This is Money’s dedicated journalists. If you open an account using links that have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.

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Administrative position Notes of charges Fund trading Standard Shares, Trusts and ETF Trading Regular investment Dividend reinvestment
AJ Bell* 0.25% Maximum £3.50 per month for shares, trusts and ETFs. £1.50 £5 £1.50 £1.50 per bid More details
Bestinvest* 0.40% (0.2% for ready-made wallets) The account fee is reduced to 0.2% for investments already made Free £4.95 Free for funds Free for income funds More details
Charles Stanley Live* 0.35% No platform fee on shares if a trade is made in that month and an annual maximum of £240 Free £11.50 n/a n/a More details
Fidelity* 0.35% on funds £7.50 per month up to £25,000 or 0.35% with regular savings plan. Free £7.50 Free Funds £1.50 Shares, ETF Trusts £1.50 More details
Hargreaves Lansdown* 0.45% Capped at £45 for shares, trusts and ETFs Free €11.95 £1.50 1% (£1 minimum, £10 maximum) More details
Interactive investor* £4.99 per month under £50,000, £11.99 over, £10 extra for Sipp Free trading worth £3.99 per month (does not apply to £4.99 plan) €3.99 €3.99 Free €0.99 More details
iWeb £100 one-off fee (not applied until July 2024) £5 £5 n/a 2%, maximum £5 More details
Accounts that have some limits but attractive offers
Etoro* No investment funds or Sipp Free The investment account offers stocks and ETFs. Be careful with high risk CFDs. Not available Free n/a n/a More details
Trade 212 Free The investment account offers stocks and ETFs. Be careful with high risk CFDs. Not available Free n/a Free More details
Free trade*No investment funds Free basic account, Standard with Isa £4.99, Plus £9.99 Freetrade Plus with more investments and Sipp costs £9.99/month inc. isa rate Without funds Free n/a n/a More details
Vanguard Only Vanguard products. 0.15% Vanguard funds only Free Free Vanguard ETFs Only Free n/a More details
(Source: ThisisMoney.co.uk, March 2024. The administrative percentage charge can be applied monthly or quarterly.

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