FINANCIAL PLANNING

What is dividend tax?

Dividend tax is a tax you pay on the income you earn from dividends. It rose by 1.25% in April to help pay for a new Health and Social care Levy. This article looks at this tax, explains the dividend tax allowance and highlights how making use of ISAs and pensions can help you invest without paying dividend tax.

Published on 09 Feb 2022Last updated on 06 Apr 20224 minute read

Written by Frances Bruce

How does dividend tax work?

Dividend tax is a tax you pay on the income earned from dividends during a tax year. You don’t pay dividend tax on all of it. The Government awards an annual allowance that keeps a chunk of your dividend earnings free from dividend tax. When you exceed the allowance there’s dividend tax to pay. The amount of dividend tax you’ll pay depends on your tax-band. It’s useful to know investments held in ISAs and pensions grow free from dividend tax (and all other taxes). 

What is a dividend?

A dividend is a payout that an investor can receive from a company that they own shares in. Dividends are a way for companies to distribute a portion of their earning to investors. They can play an important part in helping investments grow if they are reinvested and they are also a popular way of earning an income from investments. Not all companies pay out dividends.

What is the dividend tax allowance?

Every year we receive a dividend tax allowance. This is the maximum amount we can earn in dividend income during a tax year before any dividend tax is due. The current dividend tax allowance is £2,000. After that you’ll pay dividend tax based on your tax band. The dividend tax allowance does not apply to ISAs and pensions – here, investments can grow tax-free.

How much dividend tax will I pay?

The amount of dividend tax depends on your income and whether you’re a basic-rate, higher-rate or additional-rate taxpayer. Our table sets out the rates you pay after your dividend tax allowance:

Tax bands

Dividend tax rate - 2022/23

Basic (£0 - £50,270)

8.75%

Higher rate (50,271 - £150,000)

33.75%

Additional rate (over £150,000)

39.35%

You don’t pay dividend tax on ISA and pension investments

A simple way to cut or eliminate paying dividend tax is to make full use of your ISA and pension allowances every year. This is because you don’t pay income tax - including dividend tax - on investments inside these accounts. Savvy investors start by maxing out these accounts because the less tax you pay on investments, the more money you have left to invest. As a reminder, the ISA allowance is a whopping £20,000 a year and you can also usually pay as much as you earn, up to a maximum of £40,000 into a pension each year (this allowance is tapered down for higher earners).

Let Bestinvest help you invest

We offer a stocks and shares ISA, a Junior ISA and a SIPP* (Self-invested Personal Pension) to help you invest in the most tax-efficient way. For your other investments, we also offer an Investment Account. They’re quick and easy to open and transfer into. To help keep the cost of investing down, in 2022 we have also slashed our share-trading fees to £4.95 from £7.50. If you have any questions, give us a call on 020 7189 2400 and our friendly team can help you.

Important information

The value of an investment, and any income from it, may go down as well as up, and you may get back less than you originally invested.

This article does not constitute personal advice.  If you are in doubt as to the suitability of an investment please contact one of our advisers.

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.

*SIPPs are not suitable for everyone.  If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you. Please note, other taxes may apply when taking your pension income.

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