Dividends are a source of income so (inevitably) you’ll need to pay tax on any that you receive. The dividend tax rate is different to the rate of income tax you might pay on other types of earnings, so this can make things seem a bit confusing.
In this article we explain how dividends work, and what you need to know about reporting and paying dividend tax, as well as the tax-free allowances that are available.
What is a dividend?
Dividends are a type of payment which a limited company makes to its shareholders from the profits left over after paying Corporation Tax. The total amount of dividends paid out can’t be more than the company’s profits in the current or previous financial years.
Unlike other forms of income, such as a salary, they’re not subject to National Insurance, and the rate of tax is much lower too. This means that dividends are generally a tax-efficient way of taking money out of a limited company.
Who can receive a dividend payment?
Normally anyone who owns a share of the company (a shareholder), will receive a dividend payment in proportion to the number and type of shares which they own.
Shareholders might simply be investors in the company, but they can also be employees, directors, or their relatives. Being a shareholder doesn’t necessarily make you a director, but it’s fairly common for someone to be both, particularly in smaller businesses.
How much tax will I pay on my dividends?
The amount of tax you pay on any dividends you receive depends on your total income, and how much of that income is specifically from dividend payments. The good news is that you won’t need to pay National Insurance contributions on your dividend payments!
This is why lots of directors who are also shareholders tend to pay themselves using a combination of a small salary topped up with dividends, because it’s more tax efficient.
What tax-free allowances can I use against dividends?
The good news is that there are tax-free allowances which might help to reduce the amount of dividend tax that you would otherwise need to pay.
You can use the Personal Allowance (the amount you can earn before starting to pay income tax) as well as a separate Dividend Allowance.
The 2023/24 tax-free Personal Allowance
Known as the personal tax allowance, this is the amount of income you can earn in a tax year before you start paying income tax on it.
The tax-free Personal Allowance for 2023/24 is £12,570
The allowance is only available once in a tax year and it applies to the total amount of income you earn, including any dividends. So, if you receive a £10,000 dividend payment and it’s the only income you have that year, you won’t need to pay any tax on it. Double bonus points for the fact that you don’t pay National Insurance on dividends either!
How much is the 2023/24 Dividend Allowance?
The dividend allowance is the amount of dividends you can earn tax-free in a year. It’s separate to the personal tax allowance and you can use both, so there’s no tax to pay on dividends up to the allowance threshold, regardless of any other income you might receive.
If you’ve received dividends before, then you might notice that this year’s threshold is lower than the tax-free allowance which was available for dividends in the 2022/23 tax year. The government announced this reduction in the Autumn Budget statement in November 2022, and the allowance will reduce again for 2024/25 (to £500).
You can use the personal tax-free allowance for most types of income, including dividends, but the dividend allowance can only be used for dividends. We’ll show you some examples below.
Using the tax free personal allowance and the dividend allowance
Your only income in the 2023/24 tax year is a £13,570 dividend payment
- You can use all of the personal allowance (£12,570) and then your tax-free dividend allowance (£1,000) against the full amount.
In 2023/24 you earn a salary of £10,000, and then take a £5,000 dividend
- The salary is paid on a monthly basis throughout the year, so this uses up part of your personal tax allowance. The £12,570 personal allowance minus the £10,000 salary leaves £2,570 at the end of the tax year.
- You can use this leftover amount against your dividend payment. The £5,000 dividend minus the remaining £2,750 is £2,250.
- That’s all of your personal tax allowance gone, but you still have the dividend allowance. £2,250 minus the £1,000 dividend allowance leaves £1,250 to pay dividend tax on.
How much is the dividend tax rate in 2023/24?
The rate of dividend tax that you pay is based on the tax band that you fall into after adding your total dividend income to any other income you receive. Because tax works in marginal bands (a bit like a stack of containers) you might pay different rates of tax in each band.
Our tables below show the tax bands for 2022/23 and 2023/24, as well as the rate of dividend tax you’ll pay in each band for that year. To work out which band you’re in, add together your total income for the year (including dividends).
2023/24 Dividend tax rates and thresholds
Thresholds 2023/24 Dividend Tax Rate 2023/24 Personal Allowance: no tax payable on income in this band. £0 – £12,570 0% Basic-rate tax payers £12,571 – £50,270 8.75% Higher-rate taxpayers £50,271 – £125,140 33.75% Additional-rate taxpayers £125,140 upwards 39.35% 2022/23 Dividend tax rates and thresholds
Thresholds 2022/23 Dividend Tax Rate 2022/23 Personal Allowance: no tax paid on income in this band. £0 – £12,570 0% Basic-rate tax payers £12,571 – £50,270 8.75% Higher-rate taxpayers £50,271 – £150,000 33.75% Additional-rate taxpayers £150,001 upwards 39.35%
When and how do I pay myself dividends?
You can pay dividends as often as you like, just remember to follow the regulations. Most companies pay dividends quarterly, though some companies choose to pay either bi-annually or annually.
You’ll need to hold a directors’ meeting to declare the dividends (yep – even if you’re the only director), and record this in the minutes. Each dividend you declare will need a dividend voucher showing the date. Company name, the names of the shareholder, and the amount of the dividend.
How and when do I pay dividend tax?
The tax on any salary income will be collected through your payroll. But if you receive dividends from a company you’ll declare and pay tax on them by submitting Self Assessment.
Am I best taking a salary or paying myself in dividends?
If you are both a director and a shareholder of a limited company. The most tax-efficient way of earning an income may be to pay yourself through a combination of salary and dividends.
As a director, there is no minimum wage threshold so you can pay yourself as much or as little as you like in salary. If this is your sole source of income, the most common method is to pay yourself a salary up to the National Insurance threshold and pay any additional amount as a dividend.
If you have more than one shareholder or director. Another source of income, read our article about director’s salaries and dividends to find out more.
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