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Your first £2,000 from dividends is tax-free
£1,000 of your dividends will be taxed at 7.5%: £75
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Tax on dividends is calculated pretty much the same way as tax on any other income.
The biggest difference is the tax rates – instead of the usual 20%, 40%, 45% (depending on your tax band), you’ll be taxed at 7.5%, 32.5%, and 38.1%.
The numbers look strange but the reason is simple: the company paying you those dividends already paid corporate tax, so in the end it should work out to a similar tax rate.
This is mostly relevant if you own your company and trying to decide what is the best way to pay yourself: dividends or salary. Keep in mind that for salary you also need to pay National Insurance.
In your case you earned £3,000 in dividends and £29,000 in other income (this can be salary, rent, etc.).
You don’t pay income tax on the first £12,500 that you make in other income (this excludes dividends).
You pay 20% on the first £16,500 after the personal allowance.
You don’t pay any dividend tax on the first £2,000 you make in dividends.
You pay 7.5% on the next £1,000
Call HMRC on 0300 200 3300 so they can change your tax code – you’ll pay the dividend tax through your salary or pension.
If you normally file a tax return, you can also pay dividend tax through it.
When you buy stocks in a business, you can sometimes get paid in dividends. A dividend is a payment a limited company makes to share their profits with its stockholders. But not all stocks pay you dividends. Only dividend stocks will pay dividends – which probably seems obvious but it’s an easy mistake to make when you’re just starting out as an investor!
Take a look at the five types of dividend that you can get:
Dividend income is similar to savings interest paid out by a bank. When you buy a limited company’s stocks, they can reward you with dividends when they make a profit.
Dividends can be a very tax-efficient investment. By this, we mean you can earn more money because you owe less tax. Be aware though that being tax-efficient is not the same as tax evasion. Tax evasion is illegally avoiding paying tax that you owe. Tax efficiency is paying the lowest amount of tax on your profits by taking advantage of tax-free allowances and low-tax financial tools.
As you can see from the calculations above, the rate at which you’re taxed on dividends is lower than the standard income tax rates. You also don’t have to pay National Insurance on profits made through dividends. This is because the business you’ve invested in has already paid Corporation Tax on their profits, so the dividend tax rates are the difference between Income Tax and Corporation Tax rates.
As a result of the better rates, you can earn more money on the same investment through the lower tax liability.
You can earn up to £2,000 in dividends before you have to pay tax on them. Anything above £2,000 and you have to declare your earnings and file a tax return.