More than 1 million investors will be hit with a Dividend Tax bill for the first time in the 2024/25 tax year, according to an AJ Bell report. Read on to find out if you could be affected and discover some of the steps you could take to mitigate a tax charge.
A dividend is a way of distributing a company’s earnings to shareholders. Usually, dividends are issued quarterly, but some businesses may pay dividends monthly or annually. So, if your money is invested in a dividend-paying company or fund, you could receive regular cash payments from them.
Dividends from investments are not guaranteed. Companies may reduce or cut dividends if profits fall or the business faces risks.
Some business owners also choose to use dividends as a tax-efficient way to extract money from the company.
Dividends may play an important role in your financial plan and could supplement income from other sources. However, changes to the Dividend Allowance could mean your tax bill is higher than expected.
The Dividend Allowance will fall to £500 on 6 April 2024
In the 2022/23 tax year, you could receive up to £2,000 in dividends before Dividend Tax was due.
The Dividend Allowance fell to £1,000 for the 2023/24 tax year. The AJ Bell report suggests this meant an extra 635,000 people paid Dividend Tax. The Dividend Allowance will halve again on 6 April 2024 to just £500 – a move that is forecast to drag a further 1.15 million investors into the tax net for the first time.
The amount of tax you pay on dividends that exceed the Dividend Allowance will depend on which Income Tax band(s) the dividend falls within once your other income is considered. For the 2023/24 tax year, the tax rates on dividends are:
- Basic-rate: 8.75%
- Higher-rate: 33.75%
- Additional-rate: 39.35%.
So, even though the Dividend Allowance is less generous than it once was, the tax rate you pay could still be lower than Income Tax.
5 practical ways you could lower your Dividend Tax bill
1. Review your total income
Managing the income you receive from other sources could help you avoid a Dividend Tax bill or reduce the rate of tax you pay.
If dividends fall within your Personal Allowance, which is £12,570 in 2023/24 and 2024/25, they will not be liable for tax. Similarly, ensuring your total income doesn’t push you into the higher- or additional-rate tax bracket could mean you benefit from a lower tax rate.
2. Plan as a couple to use both of your Dividend Allowances
If you’re planning with your spouse or civil partner, it’s important to note that the Dividend Allowance is per individual.
As a result, passing on some dividend-paying assets to your partner could mean you’re able to utilise both of your Dividend Allowances and collectively receive £1,000 in 2024/25 before tax is due.
3. Hold dividend-paying assets in an ISA
An ISA is a tax-efficient wrapper for your savings and investments.
Dividends that you receive from investments that are in an ISA will not be liable for Dividend Tax and won’t impact your Dividend Allowance. In addition, the profits you make when selling investments in your ISA are free from Capital Gains Tax (CGT).
In the 2023/24 tax year, you can add up to £20,000 to ISAs.
4. Use your pension to invest for your retirement
If you’re investing for your retirement, pensions may provide you with a tax-efficient way to invest. Investments held in a pension are not liable for Dividend Tax or CGT. In addition, you’ll receive tax relief on your pension contributions.
Remember, you cannot usually access your pension before the age of 55, rising to 57 in 2028. As a result, it’s important to consider your investing goals and time frame, as a pension may not be appropriate for you.
In 2023/24, you can usually add up to £60,000 to your pension (or 100% of your earnings, if lower) without incurring an additional tax charge. If you’ve already accessed your pension flexibly or are a high earner, your pension Annual Allowance may be lower.
5. Assess alternative ways to boost your income
Dividends are a popular way to boost your income, but there are other options you might want to explore too.
For example, payouts from bonds may be classed as interest and could supplement your income. Interest may be liable for Income Tax, but the Personal Savings Allowance (PSA), the amount of interest you can earn in a tax year before tax may be due, could mean it’s a useful option for you.
Your PSA depends on the rate of Income Tax you pay. In 2023/24, the PSA is:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional-rate taxpayers.
Another option is to invest in non-dividend paying stocks or funds with the long-term goal of selling the assets for profit. The money you make selling investments held outside of a tax-efficient wrapper may be liable for CGT. However, the rate you pay could be lower than Dividend Tax and the Annual Exempt Amount could help you avoid a bill.
In 2023/24, the Annual Exempt Amount means you can make up to £6,000 profit before CGT is due. This allowance will halve to £3,000 in the 2024/25 tax year.
If CGT is due, the rate you pay will depend on which tax band(s) the taxable gains fall into when added to your other income. In 2023/24:
- If you’re a higher- or additional-rate taxpayer your CGT rate would be 20% (28% on gains from residential property)
- If you’re a basic-rate taxpayer, you may benefit from a lower CGT rate of 10% (18% on gains from residential property) if the taxable amount falls within the basic-rate Income Tax band.
Keep in mind that investment returns cannot be guaranteed. The value of investments can fall as well as rise.
Contact us to talk about your tax strategy for 2024/25
Using tax allowances and being aware of different options could reduce your overall tax liability. Please contact us to discuss your tax strategy for the 2024/25 tax year and beyond.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
