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

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

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.

It will then fall to £500 from April 2024, as part of the Treasury’s tax attack on depositors.

Investors who keep their investments outside of Isas and pensions should think about how much dividend tax they’ll have to pay in the coming tax year.

We look at when you have to pay tax on extra earnings and whether you have to declare this to HMRC.

When do you have to pay dividend tax?

The dividend payout will soon be changed to £1,000 for the 2023/2024 tax year, which means you won’t have to pay tax on any dividend payments you receive up to that amount.

If you are a base rate taxpayer, you pay 8.75 per cent tax on dividend payments above the £1,000 limit.

Those in the higher tax bracket pay 33.75 percent and for those subject to additional tax this rises to 39.35 percent.

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 an Isa, you don’t have to worry about paying taxes on dividend payments from the shares, as they come in tax-free packaging.

Do you have to declare dividends on your tax return?

There have been many changes to the dividend tax in recent years, which can make it difficult to determine when and how much tax you should pay.

The dividend payout was introduced at £5,000, after a drastic cut of 60 per cent in 2018, and will fall to £500 next year, meaning more people will have to pay tax on their dividends.

So when should you include dividends in your self-assessment form and who should?

Someone who is employed and paid through PAYE, and whose sole reason for completing a self-assessment tax return is because they have exceeded the dividend limit, must obviously include income from dividends.

It gets a bit more complicated for those who are not sure if they are close to the dividend limit. The same applies to those who regularly report for other reasons.

Should they declare dividends even if they are not near the limit?

Jason Hollands, managing director at asset manager Evelyn Partners says: ‘If you are already completing a self-assessment for other reasons, you must declare dividends, even if they are well below the dividend payment.

‘If you are not currently completing the Self-Assessment, but are receiving dividends in excess of £1,000, you will need to register for the Self-Assessment.

“If the dividends received are less than this, it is best to contact the HRMC Income Tax Helpline for advice.”

You do not need to include dividends from venture capital trusts (VCTs), as they are tax-free.

However, you must withdraw all reinvested VCT dividends through a dividend reinvestment plan (Drip). This is when, instead of receiving cash dividends, they are reinvested by subscribing to new shares.

In this scenario, you must include reinvested VCT dividends in the box that indicates whether new VCT subscriptions have been made.

How you can protect yourself against dividend tax

There are ways to protect against the dividend tax, primarily by placing your investments in a tax-free pack of Isa shares.

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

Experts suggest that investors consider prioritizing high-dividend investments when deciding which ones to move to your Isa.

However, if you keep growth stocks out of your Isa, you’ll need to factor in capital gains taxes and you may want to seek professional advice on the best way to handle it.

A looming capital gains tax assessment from April 6 will also reduce the annual tax-free allowance from £12,300 to £6,000. Those who have accumulated significant investment gains outside of an Isa may want to consider selling now to bank some profit while the larger capital gains tax deduction is still in effect.

You may also want to consider investing more through your retirement, as the government supplements premiums with tax relief. However, this money is tied up until you are 55. This rises to 57 in 2028, and any withdrawal above a 25 percent tax-free lump sum is subject to income tax.