Do I need to declare dividends on my self-assessment tax return?

More investors are relying on dividend income as inflation erodes their savings.

At the same time, the government will cut the tax-free allowance for dividend income in half, from £2,000 to £1,000 next month.

After that it will drop to £500 from April 2024, as part of the Treasury’s tax blitz on savers.

Investors who hold their investments outside of Isas and annuities need to think about how much dividend tax they will need to pay in the following tax year.

We look at when you need to pay tax on additional income and whether you need to declare it to HMRC.

When do you have to pay dividend tax?

The dividend allowance will soon change to £1,000 for the 2023/2024 tax year, which means you don’t have to pay any tax on dividend payments you receive up to this amount.

If you are a basic income taxpayer, you will pay 8.75% tax on dividend payments over £1,000.

Those in the higher tax bracket pay 33.75 percent, and that percentage rises to 39.35 percent for additional rate taxpayers.

When you sell your shares, you may also have to pay taxes – read our guide to capital gains tax here.

If you hold your investments in ISAs, you don’t have to worry about paying tax on your dividend payments because they are in a tax-free wrapper.

Do you have to declare a dividend on your tax return?

There have been a lot of changes to dividend taxes in recent years, which means it can be difficult to decide when and how much to pay taxes.

The dividend allowance was introduced at £5,000 before a sharp 60 per cent cut in 2018, and next year it will drop to £500, meaning more people will have to pay tax on their earnings.

So, when do you need to include earnings in your self-evaluation form, and who needs to do so?

Obviously, someone who is employed and paid by PAYE, and whose sole reason to complete a self-assessment tax return is because they exceed the earnings limit, will need to include income from dividends.

It gets more complicated for those who are not sure or about to reach the earnings limit. The same goes for those who regularly file self-assessment tax returns for other reasons.

Do they have to declare dividends even if they are not near the maximum?

“If you’ve already completed a self-assessment for other reasons, you need to declare a dividend even if it’s well below your dividend allowance,” says Jason Hollands, managing director at Evelyn Partners, wealth manager.

If you are not currently completing a self-assessment, but are receiving earnings in excess of £1,000, you must register for the self-assessment.

“If the earnings received are less than that, the best course of action is to contact the Human Resources Department’s Income Tax Helpline to request guidance.”

Dividends from venture capital funds (VCTs) do not need to be included, as they are tax deductible.

However, you will need to include any VCT earnings reinvested via a Dividend Reinvestment Plan (Drip). This occurs when, instead of receiving cash dividends, they are reinvested by subscribing to new shares.

In this scenario, you’ll need to include VCT’s reinvested earnings within the box that says if new VCT subscriptions have been made.

How to protect yourself from dividend tax

There are ways to protect yourself from dividend tax, especially putting your investments in a tax-exempt wrap of stocks and ISA shares.

This can be done by selling and buying back your investment in a process known as Bed & Isa. Spouses can also transfer assets between them tax-free to make the most of this.

Experts suggest that investors consider prioritizing high-yield investments when deciding to switch to your ISA.

However, if you hold growth stocks outside of your ISA, you need to consider capital gains tax, and you may want to get professional advice on the best way to handle this.

And the imminent capital gains tax raid from 6 April will cut the annual tax break allowance from £12,300 to £6,000. Those who have accumulated substantial investment profits outside of ISA may want to consider selling now to a bank for some of the profits while the larger capital gains tax provision is still in effect.

You may also want to consider investing further with your pension, as the government mobilizes tax-exempt contributions. However, this money will be held until you reach the age of 55. This rises to 57 in 2028, and any withdrawals in excess of 25 percent of the total tax-free amount are subject to income tax.