What tax do you pay on dividends?

What is a dividend?

A dividend is a payment of profits from 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, including corporation tax.

The amount of dividends received by shareholders is generally dependent on the percentage of the company that they own, and the class of share they own. For example, a shareholder owning 20% of a company can be allocated 20% of a dividend distribution.

For directors of owner-managed businesses, where they are the only shareholder and director, taking a combination of dividends and salary is often more tax efficient. Dividends are subject to lower tax rates than salary. In addition, National Insurance Contributions (NICs) are not payable on dividends.

How much tax do you pay on dividends?

When it comes to determining the amount of tax on dividend income, the starting point is to work out the individual's total taxable income. An individual’s taxable income is all their sources of income added together, deducting any allowable payments and reducing this amount by any available personal allowance.

Dividends are kept separate in income tax computation because they are taxed at different rates to other income, including employment income and interest.

An individual is also entitled to a dividend allowance, which is currently £500. This 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 as a dividend.

Dividend tax rates

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%

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:

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 for savings income 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 dividend 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 Norwich South can provide advice on dividends and tax planning. To find out more about our services and to book a free consultation, call 01603 981640 or fill in our online enquiry form.

Last updated: 22nd November 2024