Tax on dividends – How much do you pay?

If you earn over a certain amount of money as dividends, you may have to pay tax on it. How much tax you will pay would depend on –
1. How much dividends you have received.
2. Your total income (as a salary or self-employment).
3. Rate of dividends tax: The tax is charged at different rates depending upon how much dividends and other incomes you have received.

No Tax to pay!

Currently, for the financial year 20-21, you won’t pay any tax on dividends if the total dividends you received in a tax year was under £2000. Even if your yearly income from other sources was substantially high.

You won’t pay any dividends tax if your income is under £12500!

You don’t pay any dividends tax if your annual total income (including the income from dividends) is less than £12500. It is because any amount up to £12500 will be free from any tax as your personal tax allowance.

What if you have to pay dividends tax on them?

How much you will pay will depend on the tax rate: For the financial year 20-21, there are three tax bands that decide how much dividends tax one has to pay.

1. Basic rate of 7.5%,
2. Higher rate of 32.5%
3. Additional rate of 38.1%.

The above rates are charged based upon your income tax bands. Basically, if you are a low earner, your dividends tax rate will be charged at a lower rate, and if your income is higher, a higher tax rate will apply.
Seems complicated? Let’s try to clarify it through examples;

Example 1. Roger earned £12000 in wages working as a carpenter, and £1500 in dividends. How much tax will he pay on the dividends?
Since the dividends Roger received were less than the tax-free dividends threshold (currently £2000), he will not have to pay any tax on it.

Example 2. Sanya earned £35000 as her salary and £2000 in dividends, how much will she pay as dividends tax?
Again the total dividend amount was less than the dividends tax-free allowance of £2000 and therefore she would not have to pay any tax on it.

Example 3. Andrew earned £7000 as a self-employed person and £7000 as dividends, how much tax will he be paying?
Andrew’s total income is £14000 which is over the threshold of personal tax allowance of £12500. However, the first £2000 of his dividends earning is tax-free which brings his total earning to below £12000. As this amount is exempt under the tax-free allowance, he will not pay any tax on it.

Example 4. And lastly, an accountant earned a salary of £35000 plus £9500 as an income from dividends. How much tax will he pay on the dividends?
The combined income from the salary and dividends totals £44500. However, the £2000 dividends tax-free amount brings the total income down to £42500. As the overall income falls under the basic rate income tax £42500 – £12500 = £30000), the dividend tax will be charged at 7.5% resulting in £562 as dividend tax.

If you are still not sure how much tax you will pay on the income from dividends, head to Which? website which has a handy dividend calculator to work it out for you