Having already looked at the main rules on how dividends are taxed and how those affect basic rate taxpayers. The tax on dividends can be more complex where the dividends become subject to higher rate or additional rate tax. In this article we look at the tax rates that apply for the 2022/23 and 2023/24 tax years and give some examples of how they work in practice for higher rate taxpayers and those paying tax at the additional rate (or top rate in Scotland) for the 2022/23 tax year.
Paying dividends to higher rate taxpayers
Dividends which fall into the higher rate tax band are taxed at 33.75% for the 2022/23 tax year (33.75% for 2023/24). This includes those living in Scotland.
For the tax year 2022/23 the higher rate tax band is taxable income over £50,270 and up to £150,000 (2023/24: £50,270 to £150,000) after taking account of the personal and any other applicable allowances.
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Start nowPaying dividends to a higher rate taxpayer 2022/23 tax year - Example 1
In 2022/23 Grace received an annual gross salary of £65,000 and also received a dividend of £12,000. Grace’s whole personal allowance and the basic rate tax band of £37,700 are used up by her salary. The remaining part of her salary and the whole of the dividend will be subject to tax at the higher rate, although the dividend allowance will reduce the amount of dividend subject to tax. The tax on the dividend is calculated as:
Dividend received £12,000
Less dividend allowance (£2,000)
Taxable dividend income £10,000
The dividend is taxed at 33.75% so the total tax payable on the dividends is £3,375 (2023/24: £3,712 because the dividend allowance falls from £2,000 to £1,000 hence £11,000 rather than £10,000 of Grace’s dividend is taxable).
Sometimes a dividend will not fall neatly into either the basic rate or higher rate tax bands but instead span the two. In this case, part of the dividend will be subject to tax at the basic rate and part at the higher rate.
Paying dividends to a higher rate taxpayer 2022/23 tax year - Example 2
In 2022/23 Nigel is entitled to the standard personal allowance of £12,570 and receives the following gross income:
- Salary of £39,000
- Income from bank accounts (savings income) of £9,000
- Dividend income of £18,000
The salary is taxed first, which uses all of the basic rate band, ignoring the personal allowance that Nigel can use in such a manner as to achieve the lowest total tax payable. This leaves £1,300 (£39,000 – £37,700) that would be taxed at the higher rate so Nigel decides that £1,300 of his personal allowance will cover some of the salary.
Non-dividend savings income is taxed next. So that this is not subject to higher rate tax Nigel decides that a further £8,500 of his personal allowance will cover the savings income, as the savings allowance will cover the remaining £500. This means that the salary and non-dividend savings income uses up the total basic rate tax and £9,800 of the personal allowance. This leaves £2,770 of the personal allowance for dividend income.
The dividend of £18,000 exceeds the remaining personal allowance, so £15,230 of the dividend will be subject to higher rate tax. The dividend allowance covers £2,000 of this leaving £13,230 subject to tax at the higher tax rate.
The total tax due on the dividend of £18,000 would therefore be £4,465.12 (being 33.75% of £13,230) for 2022/23. This will increase to £4,802.62 for the 2023/24 tax year because the dividend allowance falls from £2,000 to £1,000 hence £14,730 rather than £13,470 of Nigel’s dividend is taxable).
Paying dividends to additional rate taxpayers
Dividends falling into the additional rate tax band (taxable income above £150,000) are taxed at 39.35% for the 2022/23 and 2023/24 tax years. The dividend allowance again reduces the amount of dividend subject to tax.
Dividends paid to additional rate taxpayers 2022/23 tax year - Example 1
Alan receives a salary of £155,000 in 2022/23, meaning that all his other income falls into the additional rate band. He also receives dividends of £35,000.
The first £2,000 of the dividend income is covered by the annual allowance. Therefore, based on a tax rate of 39.35%, the total tax due on the dividends is £12,985.50. This will increase to £13,379 for the 2023/24 tax year because the dividend allowance falls from £2,000 to £1,000, meaning that £34,000 instead of £33,000 of Alan’s dividend is taxable.
It is possible that only part of a dividend will fall into the additional rate band. As well as this, the next example illustrates the way in which an individual’s entitlement to a personal allowance is eroded if their income is above £100,000.
Tax on dividends paid to additional rate taxpayers 2022/23 tax year - Example 2
In 2022/23 Xavier receives dividends of £175,000. He has no other income.
Ordinarily, Xavier would be entitled to the standard personal allowance of £12,570. However, for every £2 of income above £100,000, the personal allowance available to him is reduced by £1. That means the personal allowance is completely eroded once an individual’s income exceeds £125,140. Xavier therefore has no entitlement to a personal allowance and all his dividend income is taxable, as follows:
- £37,700 of dividend income falls in the basic rate band, of which £2,000 is covered by the dividend allowance, so £35,700 is taxable at 8.75%.
- £112,300 of dividend income (£150,000 – £37,700) is taxable at 33.75%.
- £25,000 of dividend income (£175,000 – £150,000) is taxable at 39.35%.
The tax due will therefore be calculated as:
£35,700 @ 8.75% = £3,123.75
£112,300 @ 33.75% = £37,901.25
£25,000 @ 39.35% = £9,837.50
Total tax due = £50,862.50
For the 2023/24 tax year the total tax due will be £50,950 because of the change in dividend allowance from £2,000 to £1,000.
How to pay the additional tax due
Where dividend income falls into the higher rate and/or additional rate tax bands, the shareholder must be prepared to pay the additional tax due. Having calculated the amounts involved in the way described above, this will often mean putting part of the dividend received aside in order to meet the tax liability.
Usually, the additional tax must be paid to HMRC by 31 January following the end of the tax year in which the dividends are received, although you may have payments on account to make before then.
For those subject to self-assessment, the dividend income will need to be declared as part of your tax return. If you do not normally complete a tax return but have higher and/or additional rate tax to pay on your dividend income, you should contact HMRC via your local tax office. Unless your tax affairs have become particularly complex, you may not need to complete a full tax return.
The impact of paying dividends from your company
As the receipt of dividends can have an impact on an individual’s overall tax position you may want to take tax advice from your accountant before paying a dividend from your company. You will also want to consider the optimum mix of salary and dividends, which an accountant can also identify. It is also possible for shareholders to elect to waive dividends, although such waivers must be made before the dividend is declared. Care should be taken before electing to waive a dividend as HMRC may challenge the waiver and seek to charge tax on those waiving their dividend, especially where the size of the dividend paid was only possible because certain shareholders waived their dividend.
Not all shareholders want income on a regular basis and many investors will instead be looking for a medium to long term increase in the value of the shares. Sometimes a mixture of both is required and a strong and increasing dividend history will often have a positive impact on the company’s share price.
Before paying a dividend from your company you should see our article on how dividends are taxed and how those affect basic rate taxpayers.
Inform Direct calculates the dividend and tax credit amounts for each shareholder and produces dividend vouchers for you to send to them.
This article was first published in 2016 and is updated each year to cover changes in taxation rules and rates.
See our separate article on pre April 2016 dividends for an explanation of the tax on higher rate and additional rate taxpayers for dividends received before 6 April 2016.
Hello
The guidance in example 2 for the higher rate taxpayer seems to be based on the old example 2.6 in the HMRC factsheet. HMRC has snuck out fresh guidance https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet#examples. Whilst the 0% band is applied to the first £5,000 of dividends it is only those dividends not covered by personal allowance that count.
Ignoring personal savings allowance the process in your example would be to add the non-dividend income together £37,000 and deduct the basic rate band of £33,500. This leaves £3,500 which is the amount of personal allowances to allocate against the income. You allocate the remaining £8,000 against the dividends of £18,000, which leaves £10,000 of which £5,000 is charged at 0% and £5,000 at 32.5%
The reason this is correct is that the taxpayer may arrange his allowances in such way as produces the lowest amount of tax. The 0% band applies to dividends chargeable to tax, so by arranging the personal allowance as shown yields the lowest tax. There were considerable problems last year as the HMRC system worked on the old basis and would reject correctly calculated liabilities. As it has now got its guidance correct hopefully its programming has followed.
Peter, thank you for mentioning that HMRC has updated its guidance around applying the personal allowance to achieve the lowest tax payable. I have, therefore, amended the example in line with your comments.
At the beginning it says “For the tax year 2022/23 the higher rate tax band is taxable income over £50,270 ”
Why are your examples using £37,700 instead of £50,270
Subtracting personal allowance from £50,270 leaves £37,700.