What tax do you pay on dividends?
What is a dividend?
A dividend is a share of profits paid by a limited company to people who own shares in the company, known as shareholders.
Under the law, dividends can only be paid if a limited company has sufficient profits to be able to do so. The dividend is taken out of profits after a company has paid business expenses and liabilities.
The amount of dividends received by shareholders is generally dependent on the percentage of the company that they own. This assumes all the shares carry equal rights. For example, a shareholder owning 20% of a company can be allocated 20% of a dividend distribution.
Taking a combination of dividends and salary is often more tax efficient for company owners, as dividends are subject to lower tax rates than salary. In addition, National Insurance Contributions are not payable on dividends.
How much tax do you pay on dividends?
When it comes to determining the amount of tax an individual will pay on dividends, the starting point is to work out their total taxable income. An individual’s taxable income is determined by adding up all sources of their income, deducting any allowable payments and reducing this amount by any available personal allowance.
Dividends are kept separate in the income tax computation because they are charged at different rates of tax to non-savings income, like employment income, and interest.
An individual is also entitled to a dividend allowance which is currently £500 and applies to the first £500 of an individual’s taxable dividend income. Dividend income within this dividend allowance is all taxed at a special rate of 0%.
After the above deductions, you must pay tax on any further dividends. The amount of tax you pay on dividends is based on your tax band for your other income.
Dividend tax rates are lower than those for other types of income, which is why many limited company directors extract profit via a dividend.
The dividend tax rates are as follows:
| 2024/25 | 2023/24 | |
|---|---|---|
| Basic rate taxpayer | 8.75% | 8.75% |
| Higher rate taxpayer | 33.75% | 33.75% |
| Additional rate taxpayer | 39.35% | 39.35% |
Dividend allowance
The dividend allowance applies a nil rate of tax on the first £500 of dividends.
The dividend allowance is in addition to the personal tax-free allowance you have for your other income. The personal allowance for 2024/25 is £12,570.
The history of the dividend allowance is as follows:
| Tax year | Dividend allowance |
|---|---|
| 6th April 2023 - 6th April 2024 | £1,000 |
| 6th April 2022 - 6th April 2023 | £2,000 |
| 6th April 2021 - 6th April 2022 | £2,000 |
| 6th April 2020 - 6th April 2021 | £2,000 |
| 6th April 2019 - 6th April 2020 | £2,000 |
| 6th April 2018 - 6th April 2019 | £2,000 |
| 6th April 2017 - 6th April 2018 | £5,000 |
| 6th April 2016 - 6th April 2017 | £5,000 |
Income tax bands for 2024/25
A salary taken by a limited company director is taxed according to non saving income tax rates.
For the tax year ending 5th April 2025, most taxpayers benefit from a personal allowance of £12,570. This allowance is taken from your income and the balance of your non savings income is then subject to tax at the following rates in England, Wales and Northern Ireland:
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Basic rate taxpayer | £12,570 to £50,270 | 20% |
| Higher rate taxpayer | £50,271 to £125,140 | 40% |
| Additional rate taxpayer | Over £125,140 | 45% |
In Scotland, the rates for non-savings income differ as follows:
Income Tax Rates and Bands for 2024/25
| Band | Income Threshold | Tax Rate |
|---|---|---|
| Starter rate | Over £12,570 - £14,876 | 19% |
| Basic rate | Over £14,877 - £26,561 | 20% |
| Intermediate Rate | Over £26,562 - £43,662 | 21% |
| Higher Rate | Over £43,663 - £75,000 | 42% |
| Advanced Rate | Over £75,001 - £125,140* | 45% |
| Top Rate | Over £125,140* | 48% |
*The above assumes the individual is in receipt of the Standard UK Personal Allowance. Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.
Different rates and allowances apply to non-savings income such as bank interest and dividend income.
How much tax will I pay on dividends in 2024/25?
To demonstrate the tax you may pay on dividends, we have included a couple of examples below.
Example 1
An individual received a dividend of £1,000 in 2023/24.
The dividend falls within the dividend nil rate (dividend allowance) and is not taxable. No tax will be due.
Example 2
An individual receives a dividend of £10,000 in 2023/24 and has other income of £10,500.
The individual has taxable income of £7,930 ((£10,500 + £10,000) − personal allowance of £12,570). £1,000 of the dividend falls within the dividend nil rate (dividend allowance) and is not taxable. The remaining £6,930 is taxable at the dividend ordinary rate (8.75%). The tax on the dividend is £606.
For a business owner who is concerned to minimise their liability to income tax and national insurance, planning dividend extraction should be considered with their accountant to maximise tax efficiencies.
Dividend tax calculator
To calculate the tax you must pay on your dividends, you need to keep in mind:
- the tax band you are in
- income tax personal allowance of £12,570
- dividends tax-free allowance of £500 (2024/25)
How to pay your dividend tax
If your dividends are within the £500 tax-free allowance, you do not need to tell HM Revenue & Customs (HMRC).
If you earn between £500 and £10,000 in dividends, call HMRC on 0300 200 3300 and ask for a change to your PAYE tax code so that you pay the correct amount of tax. If you prefer, you can declare your dividends using a Self-Assessment tax return.
If you earn over £10,000 in dividends, you must file a Self-Assessment tax return. If not already registered for Self-Assessment, you must do so by 5th October after the tax year in which the dividend payments were received.
What other taxes do I pay on shares?
If you sell shares, you might need to pay capital gains tax (CGT) on any profits that you make.
For gains below the CGT allowance, you do not need to pay tax. In 2024/25, the tax-free allowance is £3,000.
Any gains you make above the allowance are taxed at 10% if the gains fall into the basic rate tax band and 20% if they fall into the higher rate tax band. These CGT rates do not apply to residential property, which are taxed at higher rates.
You may also have stamp taxes to pay on any purchase of shares.
Need advice on dividends tax?
TaxAssist Accountants can provide advice on dividends and tax planning. To find out more about our services and to book a free consultation, call 01206 576800 or fill in our online enquiry form.
Last updated: 15th May 2024