Many doctors own shares in companies – either their own trading company used for providing medical activities, direct investments in other companies or even indirect through investment portfolios which hold shares in multiple companies. If you have one of these investments, then there is a good chance you may receive dividends.
What is a dividend?
A dividend is the profit share you get for owning a share in that company. This could be paid direct to your bank account but in portfolios it may get reinvested in purchases of more investments. Either way it will be taxable and the amount of tax you end up paying could well have changed recently.
The dividend allowance
HMRC allow you an annual allowance – an amount of dividends you can receive before you pay any tax. This is in addition to your tax-free personal allowance. The dividend allowance was brought into existence after 6 April 2016 to try and simply tax submissions for the millions of taxpayers who hold small investments. The original allowance was £5,000 per annum but that was subsequently reduced to £2,000 then £1,000 and from 6 April 2024 the government has reduced this further to £500 per annum.
So, if your total income from dividends is below £500 you do not have any tax to pay. But any excess above £500 is taxable and a declaration will need to be made to HMRC as you will be in receipt of income on which no tax has been paid. This new reduced allowance will catch a lot more doctors.
How much tax do you pay?
That depends on what tax rate you pay income tax on at the highest marginal part of your income:
| Band | Income after personal tax-free allowance | Dividend tax rate |
| Basic Rate | Up to £37,700 | 8.75% |
| Higher Rate | £37,701 - £125,140 | 33.75% |
| Additional Rate | Over £125,141 | 39.35% |
While this may look attractive compared to income tax rates it's important to note that a company also pays corporation tax on profits it earns, so dividends are always paid out once corporation tax has been paid. So, this is a second tax charge applied to income earned.
It's worth reiterating that tax is payable even if you don’t actually get the payment. If you have an investment portfolio which reinvests income into new shares you still have to pay tax on the dividend.
Capital Gains Tax and shares
A capital gain is the difference between what you sell an investment for less what you paid for it. It is only assessed in the year you dispose of your shares in a company. What you paid for it may be a combination of the original investment but also the total of any additional investments you have made to buy more shares from either cash or reinvested dividends.
In a similar way to dividends everyone gets an annual tax-free allowance for capital gains which allows you to make some gains without having to pay tax on it. As with the dividend allowance the government reduced the tax-free capital gains allowance on 6 April 2024 to £3,000. So, you can make £3,000 of gains in any tax year with no tax due.
How much Capital Gains Tax is paid on shares?
Again, that depends on what tax rate you pay income tax on at the highest marginal part of your income:
| Band | Income after personal tax-free allowance | Capital Gains Tax |
| Basic Rate | Up to £37,700 | 10% |
| Higher Rate | £37,701 - £125,140 | 20% |
| Additional Rate | Over £125,141 | 20% |
There are also higher rates for residential property, but this is not covered in this article.
Other Considerations
There are also some further issues to consider:
- Investment in ISAs (Individual Savings Accounts) – if your shares are held in ISAs then the good news is that there is no dividend tax or capital gains tax to pay. Each individual gets a £20,000 ISA investment allowance per year so it's always worth considering using ISAs when building a share portfolio.
- Capital Gains Tax may be lower when you sell all, or part, of your business. Where you are running a business and then sell your shares then, subject to certain conditions, you may be eligible for Business Asset Disposal Relief. This reduces the tax on part or all of the taxable gain to 10%.
- Other investments: investments in some shares may also have special tax rates applied to them. These include Venture Capital Trusts (VCT) Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Schemes (SEIS) as well as some employee share ownership investment schemes.
For more information please see the following HMRC pages
https://www.gov.uk/tax-on-dividends
https://www.gov.uk/capital-gains-tax/rates