Dividends sound complicated, but they are actually very simple. If you own shares in a company and that company makes a profit, it may choose to pay part of that profit to shareholders. That payment is called a dividend.

Not all companies pay dividends. Some prefer to reinvest profits back into the business instead.

What is a dividend?

A dividend is money paid to shareholders from company profits. It is usually paid in cash, straight into your bank or investment account. Some companies pay dividends every year, some every six months, and others quarterly.

The amount you receive depends on how many shares you own and how much dividend the company declares per share.

Who can receive dividends?

You can receive dividends if:

• You own shares in a company
• The company decides to pay a dividend
• You hold the shares on the dividend record date

Dividends can be received from:

• UK companies
• Overseas companies
• Shares held personally, in a joint name, or through certain investments

Are dividends taxable in the UK?

Yes, dividends are taxable, but they are taxed differently from salary or rental income.

You get a dividend allowance each tax year. Dividends within this allowance are taxed at 0 percent, but they still need to be reported if you complete a tax return.

Dividends above the allowance are taxed at different rates depending on your income band:

• Basic rate
• Higher rate
• Additional rate

Dividends are not subject to National Insurance.

Dividends from your own limited company

If you run a limited company, dividends are a common way for directors and shareholders to take money out of the business.

Dividends can only be paid if the company has sufficient profits after tax. They must be properly declared, documented, and paid in proportion to shareholdings unless different share classes exist.

Dividends are different from salary. Salary is an expense for the company and subject to PAYE and National Insurance. Dividends are paid from profits and are taxed personally.

Dividends from overseas companies

Dividends from overseas companies are still taxable in the UK if you are UK resident.

Sometimes foreign tax is deducted before you receive the dividend. You may be able to claim foreign tax credit relief to avoid being taxed twice, depending on the country and tax treaty.

Do I need to report dividends?

If you complete a Self Assessment tax return, you must report all dividends received, even if no tax is due.

If your dividends are small and you do not normally file a tax return, HMRC may still require you to report them in some cases.

Key things to remember

Dividends are payments from company profits. They are taxed differently from wages. Not all dividends are tax free. Good records are important, especially if dividends come from multiple sources or overseas companies.

If you are unsure how your dividends should be declared or taxed, getting Taxes Done Right advice early can save time, stress, and penalties later