So, you’re a UK investor looking to build a dividend income by building a portfolio of the best UK REITs? Well, dividends are a great way to generate a passive income from your investments, but did you know that you’ll have to pay taxes on your REIT dividends in UK?
The amount of taxes you’re required to pay on your REIT dividends will depend on various factors which we’ll explore in greater detail in this article.
*p.s. in this article, we’re referring to cash dividends from REITs. Some REITs may give you the option to receive stock dividends where you’ll be paid in shares instead of cash. In those cases, unless you sell your REIT unit, you would not be taxed.
Two Types of REIT dividends in UK
Before we explore how dividends are taxed, let’s look at the types of REITs dividends that you could be receiving. Hint, this is where gets a little more complicated.
REITs can issue two types of dividends which are subject to different level of taxation:
- Property Income Distribution (PID) dividends
- Normal dividends
Property Income Distribution (PID) dividends
According to regulations, at least 90% of profits from a REIT’s property rental business has to be distributed as PID dividends, which are not subjected to corporation tax. Instead, the REIT withholds the basic income tax rate of 20% on your PID dividends and pays out the remaining 80% to you.
PID dividends are not considered as part of your annual dividend allowance (more on this in the next section), and will not be taxed again.
This means as a shareholder, you do not ‘suffer’ double taxation (i.e. once on corporate level, twice on the personal level).
Normal dividends
Any listed company can issue dividends as well. These ‘normal’ dividends will be taxed based on your income tax band which will be discussed below. (side note: if you like dividends, you’ll love these top 10 FTSE dividend paying stocks.)
And the good news is, you’re not taxed on all your dividends!
How dividends are taxed in UK
Tax-free dividends in ISA
Not all dividend payments are equal. You do not need to pay taxes on dividends you generate from your individual savings accounts (ISAs). Hence, you do not need to pay taxes on the REIT dividends you get from your ISA.
Do note that you have an ISA allowance of £20,000 for the 2022-2023 tax year on the amount you can invest via ISAs. The profits on investments held in ISAs up to the allowance is free from both Income Tax and Capital Gains Tax (GCT), so you might want to maximise your ISA investments.
That said, beyond the ISA, not all REIT dividends are not tax-free.
However, you do enjoy a “dividend allowance” every year:
What is the Dividend Allowance?
According to gov.uk, the dividend allowance for the upcoming tax year between 6 April 2022 to 5 April 2023 is £2,000.
UK investors will only need to pay taxes on dividend income above the dividend allowance.
But wait, there’s more.
On top of the dividend allowance, you also enjoy tax savings on any dividend income that falls within your Personal Allowance:
What is the Personal Allowance?
According to gov.uk, the standard personal allowance is £2,570.
Personal Allowance refers to the amount of income each individual can earn per year, without paying taxes. The income here refers to any source of income including your wages, dividends and more.
Individuals who claim a marriage allowance, blind person’s allowance or are self employed may have a bigger personal allowance limit while those whose income are above £100,000 may have a smaller personal allowance.
tl;dr you’ll be taxed on the dividend income that exceeds the Dividend Allowance and your Personal Allowance.
So…
How much will you be taxed?
Your tax rate depends on your income tax band. In short, dividends are taxed at three different rates: basic rate, higher rate and additional rate.
For your reference, here’s the current Income Tax Bands:
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
Your REIT dividends are not taxed at the same rate as your wages. Here’s the tax rate on dividends:
| Tax Band | Tax rate on dividends over the allowance |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
How to calculate how much you’ll be taxed on your REIT dividends in UK?
Here’s an example from gov.uk:
You get £3,000 in dividends and earn £29,570 in wages in the 2022 to 2023 tax year.
This gives you a total income of £32,570.
You have a Personal Allowance of £12,570. Take this off your total income to leave a taxable income of £20,000.
Since you would be in the basic rate tax band, you would pay:
- 20% tax on £17,000 of wages
- no tax on £2,000 of dividends, because of the dividend allowance
- 8.75% tax on £1,000 of dividends
Frequently asked questions
How much dividend is tax-free in UK?
According to gov.uk, the dividend allowance for the upcoming tax year between 6 April 2022 to 5 April 2023 is £2,000.
Do dividends count as income in UK?
Yes. However, dividends are taxed at lower rate as compared to other sources of income.
Thanks Alvin. Informative article as always. How about reits listed in Singapore with properties in the UK, like Elite? Do they get taxed the same way too? Or is the income both in the hand of unit holder as well as for reit is exempt ?
Hi Amit, reits listed in Singapore will follow Singapore’s tax rules (see IRAS)
We’ve listed the fee structure for REITs in Singapore here.
The REIT may be taxed on the corporate level for property transactions made in the UK.
Hi Alvin,
Good series on UK REITs. Perhaps you can provide some analysis on (1) how would retail investors domiciled in Singapore be affected by taxes on UK REITS e.g. capital gains/estate/dividend taxes (2) does it make financial sense for retail investors domiciled in Singapore to invest in UK REITs vis a vis other REITS domiciled elsewhere.
Regards
Mark
Hey Mark,
foreign investors do not need to pay taxes on dividends from UK REITs nor capital gain taxes.
there isn’t a significant advantage to invest in other REITs domiciled elsewhere.
How you are taxed in the UK on dividend payments from US REIT stocks? e.g. Realty Income, STAG etc. There is a withholding tax of 15% already applied to the dividend payments from US REIT.
The withholding tax should be processed by the US REIT. You will be tax based on the final sum of dividends you receive, depending on your income tax band.