Category: Income Tax

Understanding dividend tax

Understanding dividend tax is important for anyone who receives income from shares in a company. Dividends are taxed differently from salary, pensions and other forms of income, with their own allowances and tax rates.

For the 2026-27 tax year, individuals do not pay tax on dividend income that falls within their Personal Allowance of £12,570. In addition, there is a separate dividend allowance of £500. Dividend income received above these allowances is generally subject to tax.

The rate of tax payable depends on the individual's overall level of taxable income. For 2026-27, dividends falling within the basic rate band are taxed at 10.75%, those within the higher rate band at 35.75% and those within the additional rate band at 39.35%.

To determine the applicable rate, dividend income is added to other sources of taxable income. As a result, dividends can push an individual into a higher tax band, and different portions of the dividend income may be taxed at different rates.

Where total dividend income is £10,000 or less, an individual may ask HMRC to adjust their tax code so that any tax due is collected through their wages or pension. Alternatively, the income can be reported through a self-assessment tax return. There is normally no requirement to notify HMRC where dividend income is covered entirely by the dividend allowance.

Individuals who receive more than £10,000 in dividends must complete a self-assessment tax return. Those who do not normally file a return must register with HMRC by 5 October following the end of the tax year in which the dividend income was received.

Understanding your tax code

Your tax code tells your employer or pension provider how much Income Tax to deduct from your pay. It is set by HMRC, and you may have a different code for each job or pension.

Most people with one job (or pension) use the code 1257L, which reflects the standard Personal Allowance of £12,570. The numbers show how much tax-free income you are entitled to, while the letters explain your circumstances.

Your tax code can change if your situation changes. Common reasons include starting a new job, receiving a pension or taxable benefits, claiming Marriage Allowance, receiving company benefits, or having unpaid tax from a previous year. HMRC may also update your code if your income details are corrected.

The letters in your code provide further detail. For example, L means you receive the standard Personal Allowance, M or N relate to Marriage Allowance, and BR means income is taxed at the basic rate. Codes ending in W1, M1 or X are emergency tax codes, used when HMRC does not yet have full information.

Emergency codes tax each pay period (such as weekly or monthly) in isolation, which can temporarily lead to overpayments or underpayments of tax. These issues are usually corrected once HMRC updates your records.

A "K" prefix indicates that taxable income or deductions exceed your Personal Allowance. In these cases, your employer will apply the adjustment but cannot take more than half of your pay.

If your tax code looks wrong, you should check your details with HMRC online or through the HMRC app. Once updated, any tax difference will normally be adjusted through your next payslip.

Claiming tax relief on charitable donations

When you donate money to a charity or Community Amateur Sports Club (CASC) under Gift Aid, the organisation can claim an extra 25p from HMRC for every £1 you give. This increases the value of your donation at no extra cost to you.

If you pay higher or additional rate tax, you can also claim further tax relief on your donation. This is based on the difference between the basic rate and your highest rate of tax. The relief can be claimed through your self-assessment tax return or by asking HMRC to adjust your tax code.

For example, a £1,000 donation becomes £1,250 once Gift Aid is added. A higher rate taxpayer can then claim additional relief of £250 if they pay tax at 40%, or £312.50 if they pay tax at 45%.

You must have paid enough tax in the relevant tax year for your donations to qualify. In general, the total value of Gift Aid donations cannot exceed four times the amount of tax you have paid. If too much relief is claimed, you must notify the charity and repay the excess to HMRC.

You can also donate directly from your wages or pension through a payroll giving scheme if your employer operates one. This allows donations to be taken before Income Tax is deducted, giving you immediate tax relief at your highest rate.
 

Self-assessment tax penalties

If you are required to complete a self-assessment tax return, HMRC may charge penalties if you miss the deadline for making a filing or payment. 

There are also penalties if you fail to register on time for self-assessment. If you register late and do not pay your tax bill by the required deadline, you may receive a ‘failure to notify’ penalty. This is calculated based on the amount of tax still outstanding and is usually issued within 12 months of HMRC receiving your return.

If you submit your tax return after the deadline, you will typically receive an initial £100 penalty. This is followed by daily penalties of £10 per day after three months (up to £900), and further charges at six and twelve months based on a percentage of the tax due or a fixed amount, whichever is higher.

If you pay your tax late, additional penalties of 5% of the unpaid tax may be charged after 30 days, six months and twelve months. In addition, you will also be charged interest on the outstanding balance until it is paid.

Penalties must usually be paid within 30 days of the penalty notice date, and failure to do so may result in further enforcement action. If you believe a penalty has been issued incorrectly, you can appeal where you have a reasonable excuse, and HMRC will consider your circumstances before deciding whether to cancel or reduce penalties charged.

Further registration for Making Tax Digital

Making Tax Digital (MTD) for Income Tax is being rolled out in stages for sole traders and landlords who complete self-assessment returns. Liability to register depends on the level of “qualifying income”, which includes income from self-employment and property.

Since April 2026, those with qualifying income over £50,000 have been required to maintain digital records and submit quarterly updates of trading or property income and expenses

Further registration for MTD will be required from April 2027, when the threshold will reduce to £30,000, and in April 2028 it will further reduce to £20,000. The thresholds are based on income reported for the previous tax year, meaning your obligation to join MTD is triggered by your most recently submitted self-assessment return.

For example, the £30,000 threshold that applies from 6 April 2027 is linked to your qualifying income for the 2025–26 tax year. If your reported income for that year exceeds £30,000, you will be required to start using MTD from April 2027.

HMRC reviews your self-assessment return each year to determine your qualifying income. If you exceed the relevant threshold, they will normally write to confirm when you must start using the system. However, even if you do not receive a letter, it remains your responsibility to check whether you are required to comply and to prepare in time.

If you believe you fall within the rules but have not been notified, you should check your income against the thresholds and ascertain whether you are required to sign up.

A reminder to consider the Marriage Allowance

Many married couples and civil partners could be missing out on valuable tax savings available by claiming the Marriage Allowance. If your circumstances are suitable, this is a reminder to consider the Marriage Allowance, as a simple claim could reduce your tax bill by up to £252 during the 2026-27 tax year.

The Marriage Allowance allows a spouse or civil partner with income below their Personal Allowance to transfer £1,260 of that allowance to their partner. The standard Personal Allowance is £12,570 for the 2026-27 tax year. To qualify, the person receiving the transfer must normally be a basic-rate taxpayer and the higher-earning partner must also be a basic rate taxpayer. This generally means they have income between £12,571 and £50,270 during 2026-27. Different limits apply for Scottish taxpayers because of Scotland's separate Income Tax bands.

Although the transfer reduces the lower earner's Personal Allowance, the overall effect is usually beneficial for the couple as a whole. For many households, it provides an easy way to reduce the amount of Income Tax paid without making any changes to their working arrangements or income levels.

It is also worth remembering that claims can be backdated where eligibility existed in earlier years. Eligible couples can currently backdate a claim to 6 April 2022, which could result in a useful lump-sum repayment from HMRC.

Once a successful claim has been made, the allowance will usually continue automatically in future tax years unless it is cancelled or a change in circumstances affects eligibility. Couples whose income levels have changed recently may therefore wish to review whether they qualify and ensure they are not overlooking this tax-saving opportunity.

Are you affected by the High Income Child Benefit Charge?

Families claiming Child Benefit should be aware of the High Income Child Benefit Charge (HICBC), which can apply when one member of the household has a higher income.

The charge applies where an individual has adjusted net income of more than £60,000 in a tax year and either they or their partner receives a Child Benefit payment. The amount payable increases gradually as income rises, with the charge set at 1% of the Child Benefit received for every £200 of income above £60,000.

As a result, the impact of the charge is phased in rather than applying all at once. However, once income reaches £80,000, the charge effectively claws back all of the Child Benefit received, removing the direct financial benefit of the payments.

Eligible taxpayers can elect to have the charge collected through their PAYE tax code rather than completing a self-assessment tax return. This measure is intended to reduce the administrative burden for employees whose only reason for filing a self-assessment tax return is to declare the HICBC.

Although some families choose to stop receiving Child Benefit to avoid the charge, it is often worthwhile to continue making a claim. Registering for Child Benefit can help protect entitlement to National Insurance credits for parents or carers and ensures children are automatically issued with a National Insurance number shortly before their 16th birthday.

Taxpayers with income approaching or exceeding £60,000 should review their position regularly to ensure they are complying with the rules and making the most appropriate choice for their circumstances.

Filing your 2025-26 self-assessment tax return

The 2025–26 tax year ended on 5 April 2026, and attention now turns to filing your self-assessment tax return. While many leave this until the last minute, there are advantages to filing early.

There are two ways to file your return. You can submit a paper return, which must be filed by 31 October 2026, or file online, with a deadline of 31 January 2027. The 31 January deadline is also when any tax due for 2025–26 must be paid, along with the first payment on account for 2026–27.

Although the deadline may seem distant, preparing your return early can make a significant difference. Filing early does not accelerate the payment date, but it does give you certainty over how much tax you owe. This allows time to budget and set funds aside, avoiding pressure in January.

There are other benefits too. If you are due a refund, submitting early means you receive it sooner. It also gives more time to gather missing information, resolve queries, and avoid the last-minute rush when systems are busy and deadlines are tight.

In short, early preparation puts you in more control, whether that means planning for a future tax bill or importantly securing a repayment without delay.

Who pays Income Tax at Scottish rates?

The rules as to who pays Income Tax in Scotland is determined by whether an individual is considered a Scottish taxpayer or not. For most people, determining Scottish taxpayer status is straightforward. Individuals who live in Scotland are considered Scottish taxpayers, while those who live elsewhere in the UK are not.

If a taxpayer has homes in both Scotland and elsewhere in the UK, HMRC guidance is used to determine their main home for Scottish Income Tax purposes. Those without a permanent home who regularly stay in Scotland, such as offshore workers or hotel residents, may also be liable for SRIT.

If a person moves to or from Scotland during a tax year, their tax liability is determined by where they spent the majority of that year. Scottish taxpayer status applies to the entire tax year and cannot be split.

Those defined as Scottish taxpayers are liable to pay the Scottish Rate of Income Tax (SRIT) on their non-savings and non-dividend income.

Do you have a personal tax account yet?

Your Personal Tax Account (PTA) is an easy and secure way to manage your tax online. You can use it to check your tax code, claim a refund and update your details, all in one place, without needing to contact HMRC by phone or post.

Every UK taxpayer has a PTA, but you will need to register through the Government Gateway or GOV.UK One Login to start using it. You may also be asked to confirm your identity during the setup process. This is to keep your details safe and normally involves using photo ID such as a passport or driving licence.

Currently, the following services are accessible through your PTA:

• check your Income Tax estimate and tax code
• fill in, send and view a personal tax return
• claim a tax refund
• check your Child Benefit
• check your income from work in the previous 5 years
• check how much Income Tax you paid in the previous 5 years
• check your State Pension
• check if you will benefit from paying voluntary National Insurance contributions and if you can pay online
• track tax forms that you’ve submitted online
• check or update your Marriage Allowance
• tell HMRC about a change of name or address
• check or update benefits you get from work, for example company car details and medical insurance
• find your National Insurance number
• find your Unique Taxpayer Reference (UTR) number
• check your Simple Assessment tax bill.