Dividends are sums of money that you might receive if you own shares in a profitable limited company.
Only limited companies can pay them, and the payment comes out of profit after corporation tax.
If you earn dividends, you might have to pay tax on them:
- dividends are taxed at a different rate from most other types of income: basic rate taxpayers pay 7.5%, higher rate taxpayers pay 32.5%, and additional rate taxpayers pay 38.1%
- you don’t need to pay any National Insurance contributions for your income from them
- dividends from Stocks & Shares ISA accounts are entirely tax-free
- your first £2,000 from dividends is also tax-free.
How you pay depends on how large they were:
- if you earn between £2,000 and £10,000 from dividends, you can either do a Self Assessment tax return or pay through your PAYE tax code
- if you earned over £10,000 from them, you must file a Self Assessment tax return
- you can use this dividend tax calculator if you want to learn more.