Dividends and Tax
The Finance Act 2023 reduced the dividend allowance to £1,000 from April 2023 and £500 from April 2024. The dividend allowance can only be used for dividends.
From 6 April 2022, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate). Before 6 April 2022, these rates were 7.5%, 32.5% and 38.1% respectively. Taxable dividend income excludes, for example, dividend income from assets held in ISAs, which continue to be tax-free.
HMRC's website has detailed information as well as worked examples of how the dividend allowance operates.
When a company pays a dividend it must send a dividend voucher to the shareholder, stating the amount of the dividend and the date of payment.
A dividend voucher is a written record stating who has received the dividend, how much it was and what shares the dividend receiver owns. This is in order that taxpayers can account to HMRC for the tax they must pay on any dividends they receive.
The voucher should state:
• Company name;
• Name and address of shareholder;
• Total shareholding;
• Amount of dividend being paid;
• Date of the payment; and
• Company signature.
A dividend voucher must be kept in case HMRC requires it to be produced. More details are available on HMRC’s website.
Note that it is also possible to waive one’s rights to dividends. Business owners may choose to do this in order to keep money in the business. Only a shareholder may waive their entitlement to a dividend and a formal deed must be entered into. The waiver should state the reason why the dividend is being waived and that there is a genuine commercial reason for it. This is particularly important as regards demonstrating to HMRC that a waiver is not connected to income shifting or diverting otherwise taxable income.