There are two methods to profit from investing in a company's stock. They can appreciate in value, allowing you to profit when you sell them. Profits are also distributed to shareholders in the form of dividends. Dividends are the money you get from investing in a company.
What is the taxation of dividend income?
Because of the availability of a dividend allowance, people do not have to pay tax on the first £2,000 of dividend income. Anyone who receives dividend income (including overseas dividends unless they are relevant foreign income for remittance basis reasons) is eligible for the dividend allowance, regardless of their non-dividend income.
Dividend income is taxable at 0% if it falls within your dividend allowance, which means you owe no tax on it.
Dividends are taxed at 8.75%, 33.75%, and 39.35% on basic, higher, and additional rate taxpayers in 2022/23, respectively. When determining which rate band may apply to your dividend income, keep in mind that dividend income is classified as the highest slice of taxable income.
If you are a Scottish or Welsh taxpayer, you pay tax on your dividend income according to UK rates and bands. See below for additional details on how the dividend allowance works for Scottish and Welsh taxpayers.
If dividends fall inside the dividend allowance, taxpayers are not required to notify HMRC of their dividend income. However, taxpayers whose dividends are not covered by the dividend allowance must notify HMRC of a tax liability (those in Self Assessment should just include the amount of dividend gross income on their tax forms).
Please keep in mind that income within your dividend allowance is taxable income (albeit taxable at 0%) and thus counts towards your basic or higher rate limits, which may affect the amount of PSA you are entitled to and the rate of tax you pay on dividend income that exceeds your allowance (for more information, see What tax rates apply to me?). Serenna is a good illustration of this.
Furthermore, because the income is still taxable (albeit at 0%), it is considered as income for tax credit reasons. Dividend income is ignored for universal credit purposes, and your shares are treated as capital. If your entire capital exceeds a specific amount, you are considered to have 'tariff' income.
I make charitable contributions through Gift Aid; is there anything else I should know about the personal savings allowance and dividend allowance?
Because of personal savings and dividend allowances, many people do not pay tax on their savings and dividend income. This could be because you did not pay enough tax to cover the tax that a charity can reclaim if you made Gift Aid donations.
If you make a Gift Aid declaration and donate to charity, the charity will believe the money came from someone paying tax and will receive a refund from HMRC. HMRC may then issue you a bill for the amount they have claimed.
This could imply that you should carefully assess your tax situation before signing up for a Gift Aid declaration (or continue with regular donations under Gift Aid). Check your tax situation each year to ensure that you are paying enough tax to cover the tax component of your donation.
If you do not pay enough tax to cover this, you can still donate to charity; however, the organisation will not be able to claim Gift Aid reimbursement from HMRC. Keep this in mind when visiting attractions that urge you to Gift Aid your ticket entry.
Should I give my savings or stock to my partner?
Members of a married pair or civil partnership are taxed separately, thus each spouse or partner may be eligible for a personal allowance, a personal savings allowance, a dividend allowance, and so on.
To maximise the benefits of being taxed separately, it may be advantageous for tax purposes to transfer savings or shares to your partner, as this can save tax on attributable interest or dividends if you are part of a couple where one person has extra allowance capacity or is in a lower tax bracket than the other. You should keep in mind, however, that shifting legal title of property to your husband or civil partner may have other consequences, such as the revised ownership being considered during a separation or divorce. If you are concerned about these other consequences, you should get legal counsel.
Furthermore, transferring shares to your partner is considered a disposal for capital gains tax purposes. If you are not married or in a civil partnership at the time the shares are transferred, you may have to pay capital gains tax on the transfer. There will be no capital gains tax to pay if you transfer (gift) a cash balance in pounds sterling, regardless of whether you are married or in a civil partnership.
If you have savings or shares in joint names with your spouse or civil partner, by default, 50% of the income (interest or dividends) is taxable on you and the other 50% is taxable on your spouse or civil partner. Even if the underlying beneficial entitlement is unequal, this is the case (for example, if only one spouse or civil partner funds the savings account or purchases the shares). If your beneficial interests are unequal, you may both elect to be taxed in line with your respective beneficial interests on form 17. The election is irreversible and can only be reversed after 60 days.
In contrast, joint owners of property (such as a joint bank account or jointly-held shares) who are not married, in a civil partnership, or in partnership are taxed on their share. Even if contributions to the account are unequal, this will usually be 50:50.
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