To fully grasp what is UK dividend tax, you need to consider how to get a regular income from all your investments. Of course, dividends are a great way to start.
Dividends will only be paid by companies after they have accounted for their corporation tax and the company is still profitable. This means that a company should have greater profits generated in its previous and current financial years than its payout.
In short, UK dividend tax is a charge (or tax) on company dividends paid to investors by businesses after distributing excess cash available. The tax is charged at different rates depending on the recipients personal tax band.
Dividend Tax
A dividend tax simply refers to the tax you have to pay to get a part of a company's profits if you are a shareholder in the company. Dividend taxes are lower and not the same as an income tax rate.
If you have a limited company business, dividends are usually the most tax-efficient way of getting money from your company.
A dividend tax allowance is usually the amount you earn from tax-free dividends. This allowance is usually added to your allowance.
This means that you can earn differently from the total of our tax-free allowance, your allowance, and your dividend allowance.
You can pay your dividend tax from any of your allowances just as it is done using the income tax.
How much are UK dividends taxed?
When the question is asked, what is UK dividend tax, there are certain things you should look into. The amount you pay depends on your level of tax exposure and other levels of income you have. This situation is referred to as the marginal tax rate.
Therefore whenever you are taxed on the knowledge of what is UK dividend tax, your response depends on your different sources of income and personal allowance for income tax.
How do I work out how much UK dividend tax to pay?
You won’t pay UK dividend tax on shares held in stocks and shares in an Individual Savings Account (ISA), a self-invested pension plan (SIPP), etc.
The personal allowance for 2021/22 is £12,570 of which £8,000 has been used against your salary, leaving £4,570 available. With UK dividend tax you get the next £4,570 of dividend income, which is received tax-free.
The first £2,000 of dividends is also tax-free but this £2,000 is also part of your initial basic tax band of £37,700. The dividend amount to be taxed is £55,000 - £4,570 - £2,000 = £48,430.
How to issue a dividend
Aside from considering what is UK dividend tax is, you need to consider how it is issued.
There are several things you need to consider before you issue a dividend because it is usually issued by a company.
The first step is to declare a dividend by holding a meeting with the board of directors.
The meeting with the board of directors should be recorded and retained in case of legal actions. It should also be included in the end-of-year approval documents when the accounts are signed.
The payment made on each dividend has to be issued as a dividend voucher and all recipients of the dividend should be given a copy of the voucher. This should be done to keep account records.
It is important to note that UK dividends taxes that are not properly recorded can be likened to the loan account of the company’s directors. This could require the company or individuals involved to pay extra tax.
The dividend voucher should contain the following:
● The name of the company
● The names of all shareholders who will be paid dividends
● The date when the dividend will be paid out
● The amount that will be paid out as a dividend
The Timing Of When To Pay UK Dividend
The end of the year where there is sufficient cash available in a business is usually when dividends are paid. At this moment, year-end figures are also agreed on. This is often regarded as the final dividend.
It is interesting to know you can pay yourself dividends whenever the money is available and whenever you need it. However, in cases where the payment is not at your year-end, it is usually referred to as interim dividends.
When to pay a UK dividend, the question of “how” and “when” to make the payment often depends on the introduction of certain tax changes. Because of these changes, it is most advisable to seek a professional in profit extraction concerning potential and estimated tax liabilities.
Conclusion
There are a lot of things captured in the question: what is UK dividend tax?
Most UK dividends are recorded in accounts when they are about to be paid out. This is often calculated using the percentage of company shares owned by individual shareholders.
UK residents use dividends to receive a regular income from their investments which means that they have to pay their tax.
However, because UK dividend tax rates are often lower than personal tax rates, salary and dividends are combined by company directors to effectively pay tax.