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%|
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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