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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.

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 year.

Unlike other forms of income, such as salaries, dividends aren’t subject to National Insurance, and the rate of tax payable on them is much lower too. This means that dividends are generally a tax-efficient way of taking money out of a limited company.
 

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 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.
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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 salary topped up with dividends, because it’s more tax efficient.

Read our Guide to Tax-Efficient Director’s Salaries to learn more about this.

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 2024/25 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 2024/25 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 2024/25 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.

The tax-free Dividend Allowance for 2024/25 is

£500

 
If you’ve received dividends before, then you might notice that this year’s threshold is lower than the £1,000 tax-free allowance which was available for dividends in the 2023/24 tax year.

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, or you can use our online dividend tax calculator to work out how much tax you’ll pay on any dividend income.

Using the tax free personal allowance and the dividend allowance

Your only income in the 2024/25 tax year is a £13,070 dividend payment

  • You can use all of the personal allowance (£12,570) and then your tax-free dividend allowance (£500) against the rest, so you won’t pay tax on it.

In 2024/25 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 of your allowance unused 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 of your personal allowance leaves £2,250.
  • That’s all of your personal tax allowance gone, but you still have the dividend allowance. £2,250 minus the £500 dividend allowance leaves £1,750 to pay dividend tax on.

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 table below shows the tax bands for 2023/24 and 2024/25, 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).

Dividend tax rates and thresholds

Threshold
2023/24
Dividend Tax
2023/24
Threshold
2024/25
Dividend Tax
2024/25
Personal Allowance £0 – £12,570 0% £0 – £12,570 0%
Basic rate £12,571 - £50,270 8.75% £12,571 - £50,270 8.75%
Higher rate £50,271 - £125,140 33.75% £50,271 - £125,140 33.75%
Additional rate £125,140 upwards 39.35% £125,140 upwards 39.35%

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 name of the shareholder, and the amount of the dividend. Use our free Director’s Minutes and dividend voucher templates.
 

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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 a Self Assessment tax return.

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, or another source of income, read our article about director’s salaries and dividends to find out more.

Find out how our online accounting services can help your business by talking to one of the team on 020 3355 4047, or get an instant online quote.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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Honeysuckle Homes
Honeysuckle Homes
8th April 2022 10:16 am

Thank you, this is helpful.

Han K
Han K
8th March 2023 1:07 pm

Very clear and informative thank you

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