Don't Be Spooked By Dividends And The Tax You'll Have To Pay This October

October can only mean one thing, Halloween. Yes, it's the time of year when the little (and big) ones dress up for a night of spooky happenings and frightful trick or treating around the world.

Speaking of frightful things, to the average tax payer, the dividend tax scheme may be enough to give you a fright this Hallows’ Eve. No, no, it’s nothing too scary but it is important and worth reading about this October. Let’s begin with talking about what dividends are. Dividends are a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves). Prior to April 2016, tax payers falling in the basic rate tax band (income up to £31,785 for 2015/16) paid zero tax on dividend income.

While the tax liability was 10% of the gross dividend received, this is entirely covered by the 10% dividend tax credit. Post April 2016, the dividends regime changed for shareholders. Those now in the higher rate pay 32.5% with additional rate tax payers paying a higher stake of 37.5%. People earning over the £5000 freepay allowance, will be taxed at a rate of 7.5% up to the higher rate threshold. No matter the tax band someone may find themselves in, because dividends are already affected by corporation tax, they will pay less than that of an earned income.

Don’t forget about the dreaded payment on account system where your dividends take you over a £1000 liability. The new system removes the current dividend tax credit and will see a new tax-free allowance of £5,000 a year on dividends for all taxpayers. The £5,000 allowance sits favourably within the relevant tax band. Whilst trying to work out the payable dividends tax, one should add their income from dividends to their other taxable income when working this out. You may pay tax at more than one rate. However, you don’t pay tax on dividends from shares in an ISA if this is applicable. For people gaining dividends between £5,000 and £10,000 you must inform HM Revenue and Customs (HMRC) and the tax will be taken from your wages or pension. For people earning over £10,000 you’ll need to fill in a self-assessment tax return. If you don’t usually send a tax return, you need to register by 5th October following the tax year you had the income. Tax and dividends doesn’t have to be scary once you know the correct information. Let’s leave the spooking to the little ones this Halloween and avoid being tricked by dividends tax this October.