How are dividends taxed in the UK?

As an investor or business owner, you’re likely familiar with dividends. These are payments made to shareholders as a share of company profits. But how are dividends taxed in the UK? Let’s explore this important topic and learn more about the tax implications of receiving dividends in the UK.

Dividends are paid to shareholders out of profits generated by a company. The aim of issuing dividends is to reward shareholders for their investment in the company. However, it also helps keep shareholders interested in the future success of that company.

It’s important to note that dividend payments are not tax-deductible expenses for companies. So, they do not reduce a company’s taxable profits.

The three-tier system explained

In the UK, dividend taxation is based on a three-tier system.

  • The first tier applies to basic rate taxpayers and those earning up to £50,270 per year will pay 8.75% on dividend income above £2,000 (known as “dividend allowance”).
  • The second tier applies to higher rate taxpayers (those earning over £50,270) who will pay 33.75% on dividend income above £1,000 and additional rate taxpayers who will pay 39.35%.
  • For both tiers, there is no further tax due for those with incomes below £50,270 and no further tax due for those with incomes above £150,000 – all remaining income is taxed at 0%. This means that if you receive more than £1,000 in dividends from your investments during one year then you must pay taxes on that amount according to your income bracket.

In addition to these rates set by Her Majesty’s Revenue & Customs (HMRC), there are also other taxes which may apply depending on your individual circumstances such as Inheritance Tax or Capital Gains Tax. These taxes can be complex and its always best practice to consult with a qualified financial adviser before making any decisions regarding taxation of your investments or business operations involving dividends.

The rules around dividend taxation in the UK can get complicated quickly and it’s important that you understand them before investing any money into a company or taking advantage of any financial opportunities provided by entities located within the United Kingdom.

How can we help?

Whether you’re an international business owner or a finance director looking for ways to maximise returns from your investments while minimizing risk from taxation issues – understanding how dividends are taxed in the UK can help ensure you make sound financial decisions now and into the future.

Our international tax team have a wealth of experience in assisting multinational companies with their transfer pricing requirements. If you have any further enquiries, please get in touch with a member of our International Services team on 01293 227670.