As a shareholder of a company, the cash payouts that come alongside dividends are one of the most attractive perks. However, as with any financial gain, you must also consider tax. This year, the tax rates for dividends will be changing and understanding where and how you need to declare this additional income will be vital.
A 2023 Guide On: What Are The Dividend Tax Rates?
On the 6th of April 2022, tax rates on dividends were increased. This will affect your 2022/23 tax return, for which the tax will be payable on the 31st of January 2024. Here is everything you need to know so far:
What Is A Dividend?
A dividend is a percentage of a company’s earnings that is distributed to its shareholders. The conditions of a dividend, such as the rates, payment timeframe and type (i.e. cash or stocks), are determined by the company’s board of directors.
Companies of all scales can take advantage of dividends, particularly large corporations that generate extensive profit. When looking into our client base, we often see dividends used by owners and directors of family businesses who only take a small salary from the company but use the dividends to accumulate extra funds. Many also choose to assign shares to other family members, allowing them to receive a yearly dividend too.
How Do Dividends Work?
Companies can opt for paying dividends on a one-off basis or, more commonly, several times throughout the year. If a company makes a significant sale or makes a major profit, it may also choose to pay a one-off dividend to its shareholders – this is called an extraordinary dividend.
In most cases, dividends are determined after a company closes its annual accounts and can record a profit, as the board of directors will use these figures to distribute dividends – this is known as a final dividend.
Other types of dividends include the following:
- Interim dividend: This is given to shareholders before the end of the financial year and uses forecasts to determine how much money is distributed.
- Fixed dividend: This dividend is not related to the profit for the year. Instead, the company will set a fixed amount which will not change, even if profits increase.
What Is The Tax Rate On Dividends?
Currently, the first £2,000 of dividends each taxpayer receives is tax-free; however, this is now going to change. From the 6th of April 2023, the threshold will be cut to £1,000 and will then drop further in April 2024 to £500.
If you are a taxpayer who receives dividends above your allowance, you will have to inform HMRC of that income, as in most cases, you will need to complete a tax return to declare your taxable dividends. When doing this, dividend income will fall into the taxpayer’s highest tax band. This means it will be taxed at the following 2022-23 rates:
- Basic rate band: 8.75% (other income taxed at 20%)
- Higher rate band: 33.75% (other income taxed at 40%)
- Additional rate band: 39.35% (other income taxed at 45%
Get Prepared For The Increase In Tax Rates
With these updates in mind, we strongly recommend reviewing how and when your company pays dividends to shareholders. We are always more than happy to help you with this, so please do not hesitate to book an appointment. Our team has extensive experience supporting businesses of all scales and ensures that our advice is tailored exclusively to your requirements.