Take dividends as cash or shares?

[fiju]

A quick one here, my work has a share scheme where I can buy shares from my pay. Do I opt to take the dividends as cash or more shares?

[The Leaper]

However they are paid, as cash or as further shares, the dividend payments are subject to UK dividend tax. For HRMC details about this, the dividend tax allowance, and how the tax is paid (depending on the size of the dividend), see here:

https://www.gov.uk/tax-on-dividends

So, how the dividend tax affects you and how it is paid depends on the annual amount of the dividends and your tax band.

Most people tend to take the dividends as cash because they can finance the dividend tax out of that cash, rather than from other resources, if the dividends are taken as shares. Also, taking the cash means that all the tax issues are dealt with in the tax year that the dividends were paid.

If taking the dividends as shares, you will need to have the resources to pay the dividend tax in the tax year they arise. You will then get future dividends on these shares acquired so further dividend tax may arise. Also, there will be a time when the shares will be sold so at that time you will need to consider capital gains tax, the CGT allowance, and how to offset the expense of acquiring the shares in order to calculate CGT at the time of sale. If in the future you sell portions of shares at different dates you still have these calculations and CGT to consider, and as long as you have maintained comprehensive records the calculations are not too difficult.

Another consideration is do you need the cash at the time the dividends are paid?

Also, what are the expectations as regards the future share price if dividends are taken as shares? You can make substantial gains if shares are held long term, and the dividends can be used to finance a variety of projects. However, shares can go down too.

R.

[fiju]

Thanks. I'm currently on the lowest tax bracket - 1100L. I work for a utility company and I can't see share price fluctuating too much (in regards to going down).

I should have quite a pay increase in the next year, which may put me onto the 40% tax bracket. But if not, then in the next 3 years anyway. Not sure how that affects what I do now.
I'm not strapped for cash so I don't need the cash dividends. The idea is to hold on to them long term. But if it makes more sense to just take the cash then so be it.

[JulianPH]

You can take up to £2,000 of dividends a year completely free of tax.

This is not added to your PAYE income tax calculation.

It does not matter whether or not you actually withdraw them, just that you account for them.

[orangesrule]

JulianPH said:

You can take up to £2,000 of dividends a year completely free of tax.

This is not added to your PAYE income tax calculation.

It does not matter whether or not you actually withdraw them, just that you account for them.

I did not realise this, very interesting! Surely if you reinvest the dividend then you make the most of a possible compound effect.
Only when the div hits £2k is when you have to consider options.

To achieve this, if a dividend payment is say around 5% of a holding, then the holding would be around 40k, with nil growth this would take over 20 years to accrue paying in the max of £1800/year. Obviously this comment is dependant a multitude of variables.

[JulianPH]

orangesrule said:

JulianPH said:

You can take up to £2,000 of dividends a year completely free of tax.

This is not added to your PAYE income tax calculation.

It does not matter whether or not you actually withdraw them, just that you account for them.

I did not realise this, very interesting! Surely if you reinvest the dividend then you make the most of a possible compound effect.
Only when the div hits £2k is when you have to consider options.

To achieve this, if a dividend payment is say around 5% of a holding, then the holding would be around 40k, with nil growth this would take over 20 years to accrue paying in the max of £1800/year. Obviously this comment is dependant a multitude of variables.

Absolutely, reinvesting dividends has a huge impact on compound growth.

From a tax perspective though, it doesn't matter if you reinvest or withdraw, the dividend is taxable in the year it is received, regardless of what you do with this dividend.

This is different with capital gains on any growth, which is only taxed in the year when you crystallise any gains (as opposed to the individual years in which you accrued these capital gains).

[Groat]

Is a reinvested stock (not cash) dividend taxable?

[JulianPH]

Groat said:

Is a reinvested stock (not cash) dividend taxable?

Hi matey

Yes it is. Income (of any form, so therefore including dividends) it taxable in the year that it is received.

Just because you have this automatically reinvested it does not change the fact it was taxable income received by you.

Cheers

[JulianPH]

I forgot to add, that is one of the benefits of holding investments in a ISA/SIPP/Pension.

The dividends become tax free, along with any capital growth.

Using these wrappers does not change the investment, only the tax treatment of it.

[NickCQ]

General advice has always got to be sell shares in your employer as soon as you can and diversify to avoid excessive concentration risk.

If the worst happens (ie Corbyn expropriates the utility you work for?) you could be out of a job and down 25% on your savings at the same time.

[Groat]

JulianPH said:

Groat said:

Is a reinvested stock (not cash) dividend taxable?

Hi matey

Yes it is. Income (of any form, so therefore including dividends) it taxable in the year that it is received.

Just because you have this automatically reinvested it does not change the fact it was taxable income received by you.

Cheers

Is this quote below vvvvv nonsense, then? Or is it a USA thing and different here?

"How a Stock Dividend Works :
Also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in lieu of a cash dividend. This type of dividend arises when a company wants to reward its investors but either doesn't have the capital to distribute or it wants to hold onto its existing liquidity for other investments. Stock dividends also have a tax advantage in that they aren't taxed until the shares are sold by an investor. This makes them advantageous for shareholders who do not need immediate capital. "

(quoted from Investopedia)

Edited by Groat on Sunday 18th August 15:51

[Adam B]

fiju said:

Thanks. I'm currently on the lowest tax bracket - 1100L. I work for a utility company and I can't see share price fluctuating too much (in regards to going down

Given that I assume the divs will be below the £2k tax free level so take advantage if this, take a cash dividend and reinvest it (not in the same company to add diversification), utilities are generally good defensive stocks when the st hits the fan

[anonymous-user]

Depends whether your company has financial problems that your unaware of

[JulianPH]

Groat said:

Is this quote below vvvvv nonsense, then? Or is it a USA thing and different here?

"How a Stock Dividend Works :
Also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in lieu of a cash dividend. This type of dividend arises when a company wants to reward its investors but either doesn't have the capital to distribute or it wants to hold onto its existing liquidity for other investments. Stock dividends also have a tax advantage in that they aren't taxed until the shares are sold by an investor. This makes them advantageous for shareholders who do not need immediate capital. "

(quoted from Investopedia)

Edited by Groat on Sunday 18th August 15:51

A scrip dividend (stock dividend in the US) is very different to a cash dividend being reinvested.

What happens is that the company issues new stock and allocates this on a pro rata basis to all shareholders. Because this is newly issued stock it dilutes the existing stock.

The result is that you have more shares, but their combined value is equal to your previous smaller shareholding.

Interesting, but not relevant in the UK as unlike in the US over here scrip dividends are taxed in exactly the same way as cash dividends.

I hope that makes sense!

[DonkeyApple]

Groat said:

JulianPH said:

Groat said:

Is a reinvested stock (not cash) dividend taxable?

Hi matey

Yes it is. Income (of any form, so therefore including dividends) it taxable in the year that it is received.

Just because you have this automatically reinvested it does not change the fact it was taxable income received by you.

Cheers

Is this quote below vvvvv nonsense, then? Or is it a USA thing and different here?

"How a Stock Dividend Works :
Also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in lieu of a cash dividend. This type of dividend arises when a company wants to reward its investors but either doesn't have the capital to distribute or it wants to hold onto its existing liquidity for other investments. Stock dividends also have a tax advantage in that they aren't taxed until the shares are sold by an investor. This makes them advantageous for shareholders who do not need immediate capital. "

(quoted from Investopedia)

Edited by Groat on Sunday 18th August 15:51

Probably a US perspective or just another case of Investopedia not being too brilliant and knowing what they are talking about.

Scrip in the UK is taxed in the same was as the cash or else there would be a tax arbitrage opportunity, possibly along the lines of paying the divi from your own company to yourself as new equity and then selling old equity to effectively switch an income liability to a CGT one or something like that.

For the OP, offering scrip helps a firm retain cash, that’s really why they do it. Your scrip issue won’t cost you any money in terms of SDRT or comms so it presents a very cost effective way to build on your holding but you would have comms on the eventual exit and only you know your CGT situation etc.

I think the real question isn’t so much about the mechanics or the extremely tiny difference it will probably make but more a question as to how you personally value your labour. Obviously you have accepted that a certain amount of the labour that you give to this company you are willing to speculate with rather than take as cash, speculating that the initial value will rise at a much greater pace than any external investment that you may have made with the money so as to compensate for the increased ‘eggs in basket’ risk involved. As such, it is more to do with whether you want to increase that, maintain it or even reduce it. Or whether it is such small sums that in the grand scheme of things it’s itrelevent.