With the Autumn Budget less than a fortnight away, investors and small businesses are eagerly awaiting Chancellor Philip Hammond’s plans for dividend tax – namely, will the allowance be cut again?
Under pressure to help Prime Minister Theresa May fulfill her pledge to give the NHS an extra £20bn a year by 2023, Mr Hammond will be looking for ways to raise funds.
Dividend tax has previously been in the Chancellor’s firing line, with the tax-free allowance for 2018-19 slashed by more than half in the 2017 Autumn Budget.
But the Federation of Small Businesses (FBS) argues that another tax hike could ‘clobber’ SMEs.
Here, we take a look at what cuts to the dividend tax-free allowance could look like and how this will affect how much you pay.
How much tax do I pay on dividends in 2018-19?
If you receive dividends from a company that you hold stock in, you’ll need to pay dividend tax.
In the 2018-19 tax year, you won’t have to pay any tax on the first £2,000 of dividends that you receive, known as your tax-free allowance.
The allowance was previously £5,000, but this was cut to £2,000 in the 2017 Budget.
If your dividend income exceeds the income tax-free allowance, you pay tax based on whether you’re a basic, higher or additional-rate tax payer.
The table below shows the different dividend tax rates for basic, higher and additional-rate taxpayers.
|Tax band||2018-19 rate|
If you hold funds or shares in a stocks and shares Isa, you won’t have to pay tax on them.
You can use our dividend tax calculator to work out how much you’re likely to pay.
What happens if the dividend tax-free allowance is cut?
Let’s take an example of someone earning annual income of £40,000 and dividends of £15,000 in that same year.
Keep in mind that the threshold for higher-rate taxpayers is currently £46,350.
Under the current rules, you would end up paying the following in dividend tax (assuming other tax-free thresholds remain unchanged):
- 0% tax on the first £2,000 of dividends, thanks to the tax-free allowance (£0)
- 7.5% on the next £4,350 of dividends, using up the remaining £6,350 on the basic-rate tax threshold (£326.25)
- 32.5% on the last £8,650 of dividends, as this is above the higher-rate tax threshold (£2,811.25)
- Total dividend tax bill: £3,137.50
But we’ve also calculated how much more tax you would have to pay if the dividend tax-free allowance was cut to £1,000 and £0 in the upcoming Budget.
Dividend tax-free allowance cut to £1,000
If the dividend tax-free allowance was cut to £1,000, you would end up paying around £75 more per year.
- 0% on the first £1,000 of dividends (£0)
- 7.5% on the next £5,350 (£401.25)
- 32.5% on the remaining £8,650 (£2,811.25)
- Total: £3,212.50 (£75 more than the current 2018/19 tax bill)
Dividend tax-free allowance cut to £0
If the dividend tax-free allowance was abolished completely, you would end up paying £150 more:
- 7.5% on the next £6,350 (£476.25)
- 32.5% on the remaining £8,650 (£2,811.25)
- Total: £3,287.50 (£150 more than the current 2018-19 bill)
The table below shows a comparison of the tax bills for each dividend tax-free allowance.
|Dividend tax allowance||Dividend tax bill|
- Find out more: tax-free income and allowances
What if dividend tax rates go up?
An alternative possibility is that the Chancellor may choose to raise dividend tax rates.
Currently, you pay significantly less tax on dividend income than on income from work or pensions.
A basic-rate taxpayer, for example, pays 20% tax on their income from employment, 13 percentage points higher than on income from dividends.
To raise additional funds, the government may opt to raise the rates you pay on dividend tax while keeping the allowance unchanged.
- Find out more: what is dividend tax
How do I pay dividend tax?
For the 2018-19 tax year, if you earn up to £2,000 in dividends, you don’t need to do anything, as this forms part of your tax-free dividend allowance.
If you earn between £2,000 and £10,000, you’ll need to tell HMRC. You can inform it in one of the following ways:
- Get HMRC to adjust your tax code so that the tax is taken from your salary or pension
- Fill out a self-assessment tax return. If you earn more than £10,000 in dividends, you need to complete a tax return.
To file your tax return online, you can use the Which? tax calculator to submit direct to HMRC.
What is dividend tax?
When you own shares in a company, you can earn money from them in one of two ways.
The first is by selling the shares if they grow in value.
For more information, check out our short video below.
What happens if I pay Scottish Income Tax?
Two new tax bands – ‘starter’ and ‘intermediate’ – have been created, creating five tax bands in total.
|Tax band||Earnings||2018/19 rate|
|Top rate||More than £150,000**||46%|
- Find out more: income taxes in Scotland