Changes to the UK Dividend Allowance

The UK is significantly reducing the tax-free allowance for dividend income (the ‘Dividend Allowance’) in the coming tax years. Previously, you could receive up to £2,000 in dividend income tax-free. However, starting from April 2023 (for the 2023/24 tax year) the allowance was cut to £1,000 and will be reduced further to £500 from April 2024 (2024/25 onwards). Although this change might seem small, it can have a real impact on your tax bill.

The dividend tax rates remain unchanged, but the reduced allowance will mean more of your income will be subject to these rates. Here is a summary of the rates and allowances:

 

Dividend Allowances:

Year:2022/23:2023/24:2024/25:
Dividend Allowance£2,000£1,000£500

 

Tax Rates:

Taxpayer:Dividend Rate:Income Rate:
Basic Rate:8.75%20%
Higher Rate:33.75%40%
Additional Rate:39.35%45%

 

Any dividend income falling within the personal allowance (currently £12,570) is tax free too, but keep in mind that the personal allowance applies to non-dividend income first.

 

How will these changes affect me as a US citizen:

As a US citizen or green card holder residing in the UK and using the Arising Basis (reporting worldwide income), your dividend income may be subject to both UK and US tax.

Dividends from US corporations will always be subject to US tax, but under the US-UK tax treaty, the maximum US tax rate that can be applied to this income is 15%. The UK will also tax the gross US dividend using the rates mentioned above. However, the UK will allow a credit up to the 15% paid to the US.

To avoid double taxation on dividends from non-US stocks, UK taxpayers can claim a foreign tax credit for UK tax paid on the same income on their US tax return.

With the lower dividend allowance, more of your dividend income will be taxable, making the need for foreign tax credits on your US tax return even more important.  The timing of your payments to HMRC is crucial for managing this.

It’s worth noting that dividends from ISA’s and certain Venture Capital Trusts (VCTs) are tax-free in the UK and are unaffected by the above changes, although they are not tax-free for US purposes. Just be careful of the PFIC rules,