How are dividends taxed?

When distributing profits, companies can choose to pay their shareholders in dividends. Many limited company directors pay themselves this way along with their salary.

We’ve already given some advice on why directors should be paid a salary in an earlier blog. That’s because, among other reasons, dividends can only be paid if a company makes a profit.

But how are dividends taxed? We’ll take a look at the dividend tax rates and how much is tax free. But beware, from April, the dividend tax allowance is being cut! That means you could end up reporting more dividend income to HMRC.

Dividends are always paid ‘gross’. That means no tax deductions and you can earn an amount of dividends tax free each year. At the moment that is £1,000. But from April 2025, that will fall to £500. It means you can only earn £500 in dividends without paying tax.

Any dividends you receive from investments, such as ISAs or SIPPs (Self-Invested Personal Pensions) are also income tax free. Outside of any such investments, you pay a percentage in tax. Currently, the following dividend tax rates apply:

8.75% for basic rate taxpayers
33.75% for higher rate taxpayers
39.35% for additional rate taxpayers

Any dividend payments that fall within your personal income tax allowance (currently £12,570) is also tax-free.

How much tax will I pay?

If the annual dividends you receive are worth more than the “dividend allowance”, you’ll pay according to the Income Tax band you fall into (see above).

You will only pay tax on dividends if your taxable income is above the personal income tax allowance.

Directors should remember that limited companies do not pay any tax on dividend payments it makes to shareholders. But they must pay Corporation Tax on taxable profits, which are currently 25%.

How to pay less tax on dividends

There are ways that you can pay less tax on your dividends. With the allowance being reduced, it wise to use tax-efficient ISA accounts, pensions or house investments. ISAs offer an annual allowance of £20,000 each year and using such investments reduces the admin involved with HMRC.

Directors who are married or in civil partnerships can split their income producing assets to lower income tax and liability. Additional pension contributions can also reduce your tax bill.

Reporting dividend income

If your dividends are less than £1,000 then you don’t have to report them to HMRC. (This will fall to £500 from April 2024.)

Anyone receiving up to £10,000 in dividends can declare it in their Self Assessment tax return (SA100). If you are not already registered for Self Assessment, you can do that on the government’s website.

You’ll need to complete and file a Self Assessment tax return if you receive more than £10,000 in dividends.

Help with dividends

If you need more information about your dividends, then our team can help. We can advise you how best to make them tax efficient, so contact us today.