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How dividends are taxed

The dividend tax allowance was introduced in April 2016. It replaced the old dividend tax credit with an annual £5,000 dividend allowance with tax payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018.

The tax rate for dividends received in excess of the dividend tax allowance are taxed at:

  • 7.5% for basic rate taxpayers,
  • 32.5% for higher rate taxpayers, and
  • 38.1% for additional rate taxpayers.

It should be noted that dividends falling within your Personal Allowance, do not count towards your dividend allowance and you may pay tax at more than one rate.

If you receive up to £10,000 in dividends, you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your Self-Assessment tax return. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends, you will need to complete a Self-Assessment tax return. If you do not usually send a tax return, you need to register by 5 October following the tax year you had the income.

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