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Dividend allowance

The dividend allowance is a tax relief that allows you to earn a certain amount from dividends each year, tax-free. 

But what is a dividend?

A dividend is a payment that’s made to shareholders from a company’s (limited company) profit each year. It can only be calculated once Corporation Tax, VAT etc. has been deducted. 

It’s income favoured by many because it’s such a tax-efficient method of taking money from a business. The rate of tax that you pay on dividends is lower than the rate you pay on either your salary or your pension. 

How do dividends work?

Whenever a company creates a dividend, they need to have a meeting with all of the directors to “declare” it and then a voucher is produced with the following information:

  • Date the dividend was paid
  • Value of the dividend
  • Company name
  • The names of all shareholders who are receiving the dividend

What you need to remember about the dividend allowance

  • The dividend allowance in the 2020/21 tax year is £2,000
  • You only pay tax on the amount of dividends that go above your dividend allowance in that tax year
  • If you earned dividends under the allowance, you don’t need to do anything
  • Dividends on any shares held in a Stocks & Shares ISA are entirely tax-free, so the dividend allowance does not apply to them

Any earnings above the allowance are liable to be taxed at the below rates:

Annual salary Tax bracket Tax rate
Up to £12,500 Personal allowance 0%
£12,501 – £50,000 Basic rate 7.5%
£50,001 – £150,000 Higher rate 32.5%
£150,000+ Additional rate 38.1%

In order to pay tax on your dividends, you’ll need to do a Self Assessment tax return. You can either do this yourself via HMRC online or we can get it sorted for you at TaxScouts. 

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