Tax on REIT dividends and UK dividend tax

I think it’s well known that taxes are a minefield of information, and no matter how hard you try to get it right usually you’ll end up doing something wrong.

However, when I first heard that REIT dividend income wasn’t classed as dividend income, I got worried! My plan has always been to invest quite a bit into REIT companies, so I want to make sure my tax affairs are in order.

Standard UK Dividend Tax Allowance

For any normal dividends in the UK, you have a tax free dividend allowance of £2,000 per tax year. Your investments do NOT need to be in an ISA for you to receive this allowance – I keep seeing people say ” you get the allowance with the ISA” but this isn’t true. The allowance is for money kept outside an ISA.

You do not pay tax on any dividends from shares in an ISA.

How you pay tax on dividends

If you decide that you do need to pay tax (i.e. if you don’t have an ISA and you’ve received more than £2,000 in dividends, how you actually pay your tax to HMRC depends on the amount of dividend income you got in the tax year.

If you have received less than £10,000 in dividends in the tax year

Tell HMRC by:

You do not need to tell HMRC if your dividends are within the dividend allowance for the tax year.

If you have received over £10,000 in dividends in the tax year

You’ll need to fill in a Self Assessment tax return.

REIT dividends 

REITs will issue either PID dividends or non-PID dividends. You will be told which form of dividend it is, when you get your dividend declaration.

Profits distributed as PID dividends are paid out of tax-exempt profits of the company (i.e. the company hasn’t paid any tax on these profits) and therefore are fully taxable in shareholders’ hands as property letting income. PID dividends are normally paid after deduction of withholding tax at the basic rate of income tax (20%), which the REIT pays to HMRC on behalf of the shareholder. What this means is, if you are a basic rate taxpayer and dividends don’t push you into the higher bracket, you shouldn’t need to pay more tax on these dividends. However, if you are a higher rate payer, you will likely need to pay an additional 20%.

On the self assessment HMRC return, the PID from a UK REIT is included on the tax return as Other Income.

The non-PID element of dividends will be treated in exactly the same way as dividends received from other non-REIT UK companies, and therefore will be included within your standard dividend allowance.

Hopefully that’s helped! If you’d like to watch me explain this on my video, I’ve embedded this below!

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