What is a dividend?

There’s no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company’s profits, so payments might fluctuate depending on how much profit is available. If the company doesn’t have any retained profit, it can’t make dividend payments. Doing so will likely to see you end up in hot water with HMRC, with penalties to pay!

Before you pay yourself or your shareholders a dividend, it’s important you make sure there’s enough money in the company to cover day-to-day cash flow. It’s also good to leave some profit in the business after paying dividends so there are funds available for other activities, like upgrading assets or investing in growth.

There aren’t any hard and fast rules about how frequently you can pay a dividend, and you can basically pay yourself or your shareholders whenever you like.

That said, regularly taking ad-hoc payments at random points throughout the year can sometimes indicate that there are issues with the way that funds are being managed. Most businesses distribute them quarterly or every six months, after working out what profits are left over.

The timing of dividend payments may affect how much tax you pay

For many businesses, profits can vary dramatically from one year to the next. In a particularly profitable year, you might take a tactical approach to paying dividends to pad out leaner times. This can also produce a more even income pattern, which makes personal financial planning less stressful, and can even help you avoid paying a higher tax rate.

For instance, if your company generates profits of £50,000 in Year 1, and £10,000 in Year 2, the total profits over two years will be £60,000. Rather than paying a large dividend one year, and a small one the next, you might decide to declare dividends of £30,000 per year.

This means you’ll have a more regular income, and if all your income is from these dividend payments, you’ll be under the threshold for basic rate tax in each year.

When do I pay tax on dividend payments?

Unlike a salary, dividends aren’t taxed at source, so you’ll need to declare them as part of your Self Assessment tax return. Any tax you owe for dividends normally needs paying to HMRC by the January following the end of the tax year during which the dividend was paid.

 
So, if a dividend was paid in late March 2024 for example, the tax on it is due in January 2025. A dividend paid in May 2024 falls into the following tax year, so the tax won’t need paying until January 2025 (though you can submit your tax return earlier than that!).

Dividends come from the company’s after-tax profit, so it doesn’t pay tax in respect of any dividend payments it makes. The shareholders that receive a dividend will normally need to declare it on their Self Assessment tax return, and pay tax accordingly. We have a guide to help you get started with Self Assessment if this is brand new to you!

Business owners who operate as a limited company tend to pay themselves through a combination of a regular salary and dividend payments to be more tax-efficient. The most tax efficient salary for a company director depends on how many of you there are in the business, and other income you might receive.

What about the tax-free Dividend Allowance?

The dividend allowance is the amount of dividends you can receive in a year before starting to pay tax on them. You can use it alongside your personal tax allowance (which can also be used against your dividend income). In the 2023/24 tax year the dividend allowance was £1,000, but this reduces in 2024/25.

The rate of tax you pay on dividends depends on your tax band (called your ‘marginal rate’). For example, if your total income for the year means that you’re a basic rate taxpayer, then you’ll pay the Dividend Basic Rate. We explain the rates and thresholds in more detail in our guide to paying tax on dividends.

What are the dividend tax rates and thresholds for the 2024/25 tax year?

The rates for dividend tax aren’t as high as income tax rates, which is what makes dividends so tax-efficient. The table below shows the dividend tax rates in force for 2023/24 (6th April 2023 – 5th April 2024) and 2024/25 (6th April 2024 – 5th April 2025). You can also use our free online dividend tax calculator to work out how much dividend tax you’ll pay, and what will be left over.

2023/24 and 2024/25 Dividend Tax Rates and Thresholds

 
It’s important to understand how dividends and tax work, and to keep clear financial records both for the company as well as for your own personal income. If you can’t prove that money you receive from your business is a dividend, HMRC may consider it a salary payment – and tax it accordingly. The rate of income tax is higher than the dividend tax rate, so it can end up being an expensive mistake, especially if you also land a penalty to go with it! Ouch.

Learn more about our range of online accountancy services for businesses, or call 020 3355 4047 for a chat. Don’t forget, you can also get an instant online quote.