A reader recently sent in a question asking whether or not his wife needs to register to fill in a tax return, even though no tax will be payable on her dividend income.
The shareholdings of many limited companies are split between husband and wife (or between partners), and in some cases, the dividend income from the company will be the sole source of income for the main fee earner’s spouse.
Dividend income is taxed in a different way to salaries and is declared via the annual self-assessment process.
How are dividends taxed?
Updated for the 2023/24 tax year.
After deducting the personal allowance (if you qualify to receive it), dividend income is taxed at 8.75% if it falls within the basic rate tax band (between £12,570 and £50,270).
The personal allowance is £12,570 and is a tax-free amount, available to most taxpayers.
In other words, you only start paying higher rate dividend tax if your income is greater than £12,570 + £37,700 = £50,270.
Dividends are taxed at 33.75% in the higher rate band, and 39.35% for income in excess of £125,140 per year.
However, just because no tax is due in a given tax year, does this mean that you have no obligation to tell the tax authorities that dividends have been received?
Do you need to register or a tax return if you are a lower rate taxpayer?
Answering the original reader’s question – does the contractor’s wife have to register to fill in a tax return if her total income falls beneath the higher rate threshold, Emily Coltman from FreeAgent, told us:
“The answer to the question is yes, she does because she’s receiving dividend income, which comes under the label of ‘income from savings and investments’, of over £10,000 a year.”
All company directors are obliged to complete a tax return each year, regardless of income, and there are many other scenarios when you should complete a return.
When do you have to register to complete a tax return?
“I’d recommend she registers with HMRC as soon as she knows she’s going to receive that income. At the latest, she must register by 5th October 2023 to file a tax return for 2022/23.”
For more information, read this GOV.UK guide to registering for self assessment.
Emily Coltman ACA, is Chief Accountant at FreeAgent.