Taxation of dividend income – have HMRC failed to keep up?

In recent years, the tax rules for dividends meant that many owners of stocks and shares paid no tax at all on the dividend income they received. They did not need to report the dividend income to HMRC either.

However, things have changed: the dividend allowance has been reduced and more people will become chargeable to tax on their dividends. LITRG is concerned that HMRC have not put in place an effective process to deal with the collection of tax on dividends. As far as we know, HMRC have also done little to raise awareness among taxpayers of their responsibilities in respect of dividend income.

  This blog looks solely at dividends that are not held within any sort of ISA – income from assets held within an ISA is always tax-free.

A brief history of dividend taxation

Let’s take a look at how the tax rules for dividends have changed over the past decade.

Before 6 April 2016 – the notional tax credit

Prior to the 2016/17 tax year, dividends were deemed to have been received net of 10% tax – this was called a ‘notional tax credit’. As the basic rate of income tax for dividends was also 10%, a basic rate taxpayer had no extra tax to pay. As a result, tax was only payable on dividends if you were a higher or additional rate taxpayer.

From 6 April 2016 onwards – the dividend allowance

From 2016/17 onwards, there was a major change to the way dividends were taxed, as follows:

• Dividends are no longer treated as carrying the 10% tax credit – the actual amount received is the amount that is taxed.
• Taxpayers have a ‘dividend allowance’ – this is an annual limit, within which any dividend income is taxed at 0%.
• From 2016/17 the dividend allowance was £5,000.
• From 2018/19 the dividend allowance was reduced to £2,000.
• From 2023/24 the dividend allowance was reduced to £1,000.
• In the current tax year (2024/25) the dividend allowance is reduced to £500.

Impact of the changes to dividend taxation

When dividends came with notional tax credits, and in the following years when the dividend allowance was higher, many taxpayers with modest investments in stocks and shares did not have any tax to pay on their dividend income.

Now that the dividend allowance is only £500 per year, more people will face a tax charge on their dividend income – possibly for the first time. 

Paying tax on dividend income – HMRC guidance

We have previously published a blog post looking at untaxed income generally, the confusing mismatch between HMRC’s self assessment criteria and the legal obligation to tell HMRC about a tax liability. We won’t go into that again here – but the points are relevant, so we would encourage you to take a look at the blog if you missed it.

  Unlike with bank interest, HMRC do not receive any data about dividend payments, so if you have dividend income exceeding the dividend allowance then you need to take action to let HMRC know.

HMRC’s published guidance about paying tax on dividends on GOV.UK is quite basic and, in our view, is not very helpful.

HMRC say that if the total dividend income is more than £10,000 for the year, you should register for self assessment and submit a tax return. For those with dividend income of up to £10,000, and who do not otherwise need to prepare an annual self assessment tax return, HMRC’s guidance is as follows:

We think the above guidance leaves the following questions unanswered:

• When does a person need to contact HMRC about the dividends – during or after the end of the tax year?
• The guidance suggests that a person can change their PAYE tax code (if they have one) to include the income. This would suggest that the adjustment is made during the tax year that the income is received. The taxpayer might not know exactly how much dividend income they will receive (as was the case in the example of Mary, above) – so is it ok to estimate the income?
• After the tax year, if the dividend income is different to any estimate included in the tax code, does the taxpayer need to contact HMRC again to provide the updated figure – and if so, when and how is the adjustment dealt with?
• What happens in following years? Is an amount automatically included in future tax codes?
• If the person does not have a PAYE tax code, how will they pay the tax?

So, what should taxpayers do? Below we provide some suggested courses of action for taxpayers who are unsure what they need to do, and explain our understanding of how HMRC will deal with the information given.

LITRG tips – reporting dividends

If you receive (or expect to receive) dividend income that exceeds your dividend allowance in 2024/25, then we suggest you do the following:

Taxpayers already in self assessment

If you usually prepare a self assessment tax return each year, you can include the income on your tax return as normal. You do not need to take any action before the end of the tax year in which the income arises.

Taxpayers not in self assessment

Firstly, if your dividend income is more than £10,000 in a tax year, you should register for self assessment. We set out the registration deadlines in our guidance.

If your dividend income is up to £10,000 (but more than the dividend allowance), you will need to contact HMRC. You can find HMRC’s contact details on GOV.UK.

PAYE source of income

If you have a PAYE source of income (such as employment or a private pension), you must let HMRC know about your dividend income by 5 October following the end of the tax year. So, for 2024/25, you must tell HMRC by 5 October 2025.

If you tell HMRC an estimate of your likely dividend income during the tax year, they can adjust your current year tax code to include it. This should mean that tax is collected gradually over the rest of the current tax year via your tax code. At the end of the tax year (after 5 April 2025), you will need to make a note to check what the final dividend income was, and then contact HMRC again with the final figure.

If you tell HMRC your actual dividend income received for 2024/25 after the end of the tax year (after 5 April 2025), HMRC will calculate what tax is owed on the dividend income and let you know how you can pay the tax. In most cases, HMRC will collect the tax via an adjustment to next year’s PAYE tax code.

Once HMRC know about a source of dividend income, they will probably include an estimate of each year’s dividend income in your PAYE tax code.

No PAYE source of income

If you do not have a source of PAYE income, then you will need to wait until the end of the tax year and then contact HMRC to let them know what dividend income you received. You must tell HMRC about your dividend income by 5 October following the end of the tax year. So, for 2024/25, you must tell HMRC by 5 October 2025. HMRC will then send you a simple assessment, along with details of how to pay.

  HMRC will often send a simple assessment automatically following the end of the year if they identify an underpayment of tax, based on information they have available. This will not include dividend income, unless you have already told HMRC about the income. Therefore, if you receive a simple assessment after the tax year and you have taxable dividend income, you should check that this is included in the assessment. You must let HMRC know if the simple assessment is incorrect and provide details. The simple assessment letter should explain how to do this.

Are HMRC doing enough?

We are concerned that HMRC are not doing enough to raise awareness that people need to proactively make contact with them to report any taxable dividend income. We strongly encourage HMRC to increase public awareness about this.

It seems to us that HMRC (like taxpayers!) have got used to tax not being payable on dividend income for many people with modest shareholdings – but the tide has now turned! HMRC’s process for collecting tax on dividends has failed to keep pace with the fact that many more people outside of self assessment will now have to pay tax on dividends. We think there needs to be a better system developed (and better guidance) to help people easily meet their tax obligations.

For instance, it is curious that, according to the GOV.UK guidance above, the main way of telling HMRC about dividend is by calling their helpline. Given that we know HMRC’s ambition is to reduce telephone contact and encourage people to use online channels, it would make sense for them to develop an easy online (and App) method to report untaxed income.

Failure by HMRC to make improvements could mean taxpayers are unaware of their responsibilities or daunted by the process, resulting in tax liabilities going unreported. This in turn could easily lead to an increase in compliance activity by HMRC in future years – and a good deal of stress for taxpayers who have unwittingly failed to take action and then need to sort matters out later.