Dividend Tax Changes in 2018/19: Everything you need to Know

Dividend Tax Changes 2018

From 6 April 2018, people and investors who run their own company could be triggered with a bigger tax bill as there is a cut in the tax-free dividend allowance by £3,000.

The amendments were first announced by Chancellor Philip Hammond in the 2017 Budget. The slash rate is likely to carry an effect on employees and directors of small businesses who prefer to pay themselves wholly or partly through dividends instead salary.

What is Dividend Tax?

There are two methods of earning money, when you own shares in a company.

The first is to wait for the company to grow in valuation, permitting you to make a profit whenever you sell your shares.

The other method deals with the companies distributing some of the profits they make to shareholders, annually, in dividends form.

While dividends can be a competent way to make money, they are considered a taxable income form and therefore dependent on a special dividend tax.

The rates of dividend tax are different from the income tax on savings interest, your pension or your salary. You don’t need to pay dividend tax on stock and shares you held in an Isa.

Dividend tax rates 2018/19

Now you can earn up to £2,000 in dividends from 6 April 2018 onwards before you pay any tax in the 2018/19 tax year.

This has minimized by more than half, from £5,000 in the 2017/18 tax year, which operate between 6 April 2017 and 5 April 2018.

You have to pay tax based on your tax band, if you are earning dividends above the £2,000 allowance which is known as a marginal tax rate.

The table below highlights the different dividend tax rates for basic, higher and additional-rate taxpayers.

Income tax band Rate
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

 

How much dividend tax do I need to pay?

The changes in dividend tax-free allowance will increase the tax bills of some investors.

For example : you’re earning £10,000 of dividends in a year. Your tax bills will go like this way:

  1. If you are a basic tax payer, you will see an increase in your dividend tax bill by £225
  2. If you are a higher rate tax payer, you will see an increase in your dividend tax bill by £975
  3. If you are an additional tax payer, you will see an increase in your dividend tax bill by £1,143 

How do I pay dividend income tax?

You don’t need to do anything if you’re earning up to £2,000 in dividends in 2018/19. You also don’t need to inform HMRC, simply enjoy your dividend income as you deemed fit.

Divident tax
Divident tax

And if you’re earning between £2,000 and £10,000, you’re required to inform HMRC. You can pay the tax due in one of the two methods: you need to adjust your HMRC tax code so that your tax is obtained from your salary or pension or you can fill out a self-assessment tax return.

If you’re earning above £10,000 in dividends, you’re required to complete a tax return.

What Dividend tax rate do I pay?

To discover the dividend tax rate you need to pay, you’re required to add your dividend income to your other taxable income such as your savings income and your salary.

You are required to pay income tax as per the three marginal tax bands, only if you’re living in England, Northern Ireland or Wales.

Tax Rate Earnings 2018/19 rate
Personal Allowance £0-£11,850      0%
Basic rate £11,850-£46,350     20%
Higher rate £46,350-£150,000     40%
Additional rate More than £150,000     45%

 

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