Do You Pay National Insurance On Dividends Income?

Delving into the world of dividend taxation as a UK taxpayer can be a nuanced journey for investors and business owners alike. If you ask yourself,

do you pay national insurance on dividends?

The answer is no, you don not pay national insurance contributions on your dividends income.

​However, dividend income involves various additional factors presented in this article.

As an integral aspect of tax planning, understanding how dividends are taxed is crucial for making informed decisions and optimizing your overall financial strategy.

This guide aims to empower you with the knowledge needed to navigate the complexities of dividend taxation in the UK.

How is dividend income taxed in UK?

The UK has a dividend allowance, meaning a certain amount of tax-free dividend allowance can be received tax-free.

The yearly dividend tax allowance has unfortunately halved compared to the previous tax year.

In 2023/2024 a tax relief is equal to £1000.

Any dividend income falling within your Personal Allowance is exempt from taxation.

The personal tax-free allowance is £12.570 for 2023/2024 and will not increase until at least 2028.

The amount of tax you incur on dividends exceeding the dividend allowance is contingent on your Income Tax band.

​Income tax rates:

Basic rate             £12,571 to £50,270

Higher rate          £50,271 to £125,140

Additional rate   over £125,140

Dividend tax rates are as follows:

Basic rate            8.75%

Higher rate        33.75%

Additional rate 39.35%

Example:

If you get £30000 salary and a £4000 dividend payout, this will bring your total income to £34000 which is classified as a basic rate.

£3000 will be taxed at 8.75% which equals to £262.5.

If you receive a higher salary of £51000 salary and a £4000 dividend payout, you will pay tax of £1012.5

How much dividend can I pay myself without paying tax?

Company shareholders or business owners who hold a share of the company can receive £12.570 personal tax allowance plus £1000 dividend allowance as a total dividend income free of any levy.

Is it better to take a salary or dividends?

If you fall within the lower rate bracket, you are most likely better off taking dividends.

If you are in a group of higher rate taxpayers, you should seek professional advice not to miss on potential gains as everyone’s personal circumstances are different and there is no straightforward answer.

Don’t forget about other ways to reduce how much tax you pay like voluntary contributions to your pension.

Do you pay national insurance on dividends in an ISA?

The good news is dividends from shares held in an ISA are exempt from tax liability.

Do I need to tell HMRC about dividends?

There is no requirement to inform HMRC if your dividends fall within the dividend allowance for the tax year.

If the total amount of dividends is higher than £1000 but lower than £10000, you should report it via letter, call the helpline or include it in a Self-Assessment tax return.

If your annual dividend payments are above £10000, you must complete a Self Assessment tax return form.

Things to remember

Tax rules are subject to change, and it’s crucial to be aware of any updates or amendments to legislation. Tax rates and allowances may be adjusted in each fiscal year.

It’s highly recommended to consult with a tax professional or refer to the latest guidance from HMRC for the most accurate and current information tailored to your specific circumstances. Taxation can be complex, and professional advice ensures compliance with the latest regulations.

A consultation with a knowledgeable tax professional will provide the most tax-efficient way to keep sufficient profits.

It is crucial to regularly update your personal details with the National Insurance system to ensure accurate and secure records.