Tax on share dividends

Ali71

Hi all,
I inherited shares after my fathers death last year. I am a bit worried about how to pay the tax on them as I've always been PAYE, never had to fill out a self assessment form!! Just had a chat on the HMRC helpline with a guy who said I could fill in a SA form online in April once I have the total of dividends paid in the tax year, and then could pay either on line or over the phone and gave me the payment helpline and technical support helpline in case i got stuck. I don't really want to report it to them over the phone and have them adjust my PAYE tax code for the next year, as strange things can happen when tax codes get changed. I also asked him to double check on the rate of tax on the dividends. I thought it had gone up from 7.5% to 9%, but he checked, came back to me and said it was 20% on everything over the £2000 allowance. I've since checked again on the Gov. uk website and it looks like it's going to be 7.5 + 1.25% from April 2022, so NOT 20%!! That's a relief!

Can anyone please just confirm the easiest way to report and pay the tax on dividends and that I have my figures right? I am a basic rate taxpayer.

Many thanks

Dazed_and_C0nfused

Sounds like you got a trainee!

The first £2,000 of dividend income is taxed at the dividend nil rate of 0% (confusingly called the Dividend Allowance on gov.uk).

If you have dividends above £2,000 but are only liable to tax at basic rate (including the dividend income) then you would be charged 7.5% in the current tax year.

From 2022:23 the dividend nil rate remains £2,000 and 0% but the basic rate on dividend income will increase to 8.75%.

If you want to avoid complications with your tax code then Self Assessment is the safest option.  But it is crucially important you complete the final sections of the return correctly.  You need to confirm that you don't want the tax due for 2021:22 (or whatever tax year the return is for) collecting via your tax code and you need to confirm you don't want any extra tax due for the current tax year (the one you are filing the return in) to start being collected via your current tax code.

That way you will just have to pay the tax due on your total income (less PAYE tax already paid) by 31 January following the end of the tax year. 

So for 2021:22 it would be payable by 31 January 2023.

lozzy1965

One way is to do a self assessment form, reporting your dividends.  You only need to do it if it is over £2K outside of an ISA, so another option is to trickle them into an S&S ISA until they are all there (selling outside and buying back inside).  You won't need to report once your dividends fall below £2K.
You can also diversify into a wider range of shares or funds that way too - depending on how undiversified you are right now. 

eskbanker

Ali71 said:

I inherited shares after my fathers death last year.

Putting aside sentimental reasons, if you had the equivalent in cash just now, would you buy these shares?

If not, then you might just sell them and use the money for something else.

If you do hang onto them (or if you invest in something else for that matter), you should consider doing so within tax wrappers such as a S&S ISA and/or a SIPP, which negates both dividend taxation and (eventual) capital gains tax.

Ali71

Hey good people,

Thank you for your replies, very helpful. Dazed, thanks for that tip about the final sections in the form. I've always been happy to be PAYE and the thought of filling in one of those things makes my hair stand on end. I should be ok then waiting until April when I get the sum of the dividends paid for in the tax year then. I will look in to changing them bit by bit to ISA's but of course then the broker has to sell and immediately buy them back again to put in to an ISA so that I guess would mean a Capital Gains tax on any money the "sale" made on what I inherited them at. Even though I would effectively be selling them one minute and (literally) buying them back at the same rate the next. I'll have a word with my share people. Yes, I think if I had the money I would buy the shares, as they pay far and away more than any bank or building society account would give you.   I'm afraid I don't understand enough about funds etc to think about investing in them. 

P.S. The share people must report to HMRC each year on dividends paid, so they should know anyway what I had received. I'm just telling them in a timely manner so I avoid any nasty brown envelopes falling through the letter box!!

Many thanks for your help.  

eskbanker

Ali71 said:

I will look in to changing them bit by bit to ISA's but of course then the broker has to sell and immediately buy them back again to put in to an ISA so that I guess would mean a Capital Gains tax on any money the "sale" made on what I inherited them at. Even though I would effectively be selling them one minute and (literally) buying them back at the same rate the next. I'll have a word with my share people.

But you have an annual CGT allowance of £12,300, so if you sell (prior to buying back within the ISA) just enough to realise a gain of that amount then you don't actually pay any CGT.  Rinse and repeat every tax year....

Edit: if you only inherited the shares last year, then moving £20K worth into an ISA is unlikely to realise a gain of anywhere near the CGT allowance anyway, so the above is probably moot, but the principle remains that CGT can be avoided, or at least minimised, if phasing sales across multiple tax years.

ColdIron

Ali71 said:

I've always been happy to be PAYE and the thought of filling in one of those things makes my hair stand on end.

Unless your affairs are complex, filing out a self assessment is a doddle. I doubt you will need to do much more than transpose your P60 details and the dividend figure

Ali71

Thank you both,

Yes ESK, I take your point on board about realising a nil CGT charge by selling just enough to come below the limit. Interesting. So I should be able to easily transfer in to an Isa just before April, and again just after without having to even think about CGT. Time to buy some new batteries for the calculator.........and some paracetamol for the headache all the serious thought is going to give me. You'd never think I worked in accounts, would you? 

Thank you. 

eskbanker

Ali71 said:

Yes, I think if I had the money I would buy the shares, as they pay far and away more than any bank or building society account would give you.   I'm afraid I don't understand enough about funds etc to think about investing in them.

Going back to this comment, it's not really a sensible comparison to make - investments can outperform savings and usually will over the long term, but the higher rewards come with higher risk of capital loss, which is often mitigated (but not eradicated) via diversification into funds.  So, it would normally be appropriate to compare shares with collective investments (both of which suit long term money), rather than with cash deposit accounts (more suited to short term requirements)....

Is it an extensive portfolio of a range of shares, and how well diversified is it?