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.

The cut: The government halved the tax-free dividend allowance and investors will now have to pay tax on income over £1,000 from next month

The cut: The government halved the tax-free dividend allowance and investors will now have to pay tax on income over £1,000 from next month

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?

Tax due: If you have received more than £1,000 in dividends from your investments and have not already completed a tax return, you must register for a self-assessment

Tax due: If you have received more than £1,000 in dividends from your investments and have not already completed a tax return, you must register for a self-assessment

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

Five things to consider when choosing an ISA investment platform

1. Cheaper is not always better: You need to consider a combination of price and service – it’s worth paying for the quality but make sure you actually get it.

2. What will you invest in: Different dealing fees for stocks, mutual funds, and funds mean that you need to think about how you invest and customize your selection accordingly.

3. Tools and information: What level of tools and useful information for portfolio building does the platform provide?

4. Total fees: Don’t just look at management fees or handling fees. You need to combine the two to get a real cost, along with costs like dividend reinvestment and regular dealing fees. Low management fees may sound good, but if you’re an active investor who buys and sells a lot, dealing fees will soon skyrocket and drive up costs.

5. Extra fees: Check out regular monthly investment discounts, dividend reinvestment fees, transfer fees, and other items

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.

Compare the best DIY investment platforms for stocks and stocks ISA

Investing online is simple and cheap and can be done from your computer, tablet or phone at the time and place that suits you.

When it comes to choosing a DIY investment platform, a stock and Isa stock or a general investment account, the range of options can seem overwhelming.

Each provider offers a slightly different proposition, charging more or less fees for trading or owning stocks and giving access to a different set of stocks, funds, and mutual funds.

When evaluating which service is right for you, it’s important to look at the service you provide, along with administrative fees and handling fees, as well as any other additional costs.

To help you compare the best investment accounts, we’ve rounded up the facts and put together a comprehensive guide to choosing the best and cheapest investment account for you.

We highlight the major players in the table below but we recommend that you do your own research and consider the points in our full guide linked here.

>> This is Money’s complete guide to the best investment platforms and Isas

The platforms featured below are independently selected by This is Money journalists. If you open an account using links marked with an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.

DIY investment platforms, stocks and stocks ISAS
responsible official Fee notes dealing in the fund Standard share, trust, ETF trading regular investment Dividend reinvestment
AJ Bell * 0.25% £3.50 max per month for shares, trusts and ETFs. £1.50 £9.95 £1.50 £1.50 per deal More details
bestinvest* 0.40% (0.2% for ready-made portfolios) Reduced account fees to 0.2% for ready investments free £4.95 Free for money Free for income funds More details
Charles Stanley Direct 0.35% No platform fee on shares if trading in that month and a maximum of £240 per annum free £11.50 unavailable unavailable More details
devotion* 0.35% on funds Fee £45 up to £7,500. £45 max per annum for shares, trusts and ETFs free £10 Free funds £1.50 share, ETF funds £1.50 More details
Hargreaves Lansdowne* 0.45% A maximum of £45 for shares, trusts and ETFs free £11.95 £1.50 1% (£1, £10 max) More details
Interactive Investor * £9.99 per month, or £4.99 under £30,000, £12.99 for Sipp £5.99 per month in free trading credit (does not apply to the £4.99 plan) £5.99 £5.99 free £0.99 More details
iWeb £100 one time £5 £5 unavailable 2% up to a maximum of £5 More details
eToro * Free but no isa or seb The investment account offers stocks and ETFs. Beware CFDs are high risk trading account Unavailable free unavailable unavailable More details
Freetrade* Free for a basic account, £4.99 per month for a standard account with ISA Freetrade Plus with more investments and Sipp is £9.99 per month. Issa fees no money free unavailable unavailable More details
forefront 0.15% Vanguard money only free Free only Vanguard ETFs free unavailable More details
(Source: January 2023. % admin fee may be charged monthly or quarterly

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