What are dividends, how are they taxed, and what are the UK dividend tax rates?

You may have recently started your firm and incorporated, or you may have switched to a limited company structure. Whatever your circumstances, you’ve almost certainly heard about dividends in business circles but may be unfamiliar with them. Therefore, if you operate a limited company, this blog post will assist you by defining dividends, when they can be paid, and how they are taxed.

What are dividends?

Dividends are payments made by a company to its shareholders from the profits it has earned. They represent a share of the company’s after-tax profits distributed to reward shareholders for their investment.

Dividends are usually paid in cash but can also be issued as additional shares. These payments are not guaranteed and depend on the company’s profitability and available funds.

Dividends differ from salaries because they are paid from profits after Corporation Tax has been deducted. More details on Corporation Tax can be found in the Corporation Tax Returns section.

For company directors who are also shareholders, dividends can be a tax-efficient way to receive income compared to taking a higher salary. The balance between salary and dividends is explained in the guide on How Much Should I Take as a Salary from a Limited Company.

Starting a company to benefit from dividends involves company setup, which is covered under Limited Company Formation. Additional information about company structures is available in the Limited Company section.

Understanding what dividends are is essential before exploring how dividends are taxed and the related dividend tax rates.

UK Dividend Tax Rates for 2025/26

Understanding dividend tax rates is crucial for anyone receiving dividend income. For the 2025/26 tax year, dividends are taxed at what rate depending on your total taxable income and tax band. The current UK dividend tax rates are:

These rates apply to dividend income above the tax free dividend allowance (see next section). Knowing how are dividends taxed helps you plan your income withdrawals efficiently and avoid unexpected tax bills.

Tax Free Dividend Allowance

The tax free dividend allowance for the 2025/26 tax year is £500. This means you can receive up to £500 in dividends without paying any tax. This allowance applies regardless of your total income or tax band.

If your dividend income exceeds this allowance, you will pay tax on the excess amount at the rates shown in the dividend tax rates table above. For example, if you receive £1,000 in dividends, only £500 will be taxable.

It’s important to note that dividends received within an ISA remain completely tax-free and do not affect your allowance.

Dividends and Taxable Income

Dividends and taxable income are combined to determine your overall tax liability. Your total income, including salary, rental income, and dividends, determines which tax band you fall into and therefore dividends are taxed at what rate.

For example, if your salary uses up your personal allowance and basic rate band, any dividends you receive may be taxed at the higher or additional rates. Conversely, if dividends are your only income, you benefit from the personal allowance plus the dividend tax allowance, meaning you may pay no tax on dividends up to £13,070.

Understanding this interaction is key to managing your tax efficiently and knowing how much are taxes on dividends you might owe.

How does the company issue dividends?

Issuing dividends follows a formal legal process to ensure the company complies with UK company law and tax rules.

Key steps in issuing dividends:

• Profit Availability: Dividends can only be paid out of distributable profits, the company’s accumulated post-tax earnings.

• Board Meeting: Directors must hold a meeting to formally ‘declare’ the dividend, even if there is only one director. Minutes of this meeting must be recorded and kept.

• Shareholder Notification: Shareholders must be informed of the dividend declaration, and dividends are paid in proportion to share ownership unless the company’s articles specify otherwise.

• Dividend Voucher: For each payment, the company must issue a dividend voucher showing the date, company name, shareholder names, and dividend amount. Copies should be kept for company records and given to shareholders.

• Legal Compliance: Directors must ensure the dividend payment does not exceed available profits and does not put the company at risk of insolvency. Failure to comply can lead to personal liability.

Dividends can be declared at any time during the year, with companies often paying them annually, semi-annually, or quarterly, depending on their financial position. For efficient dividend management and compliance, many companies use accounting software such as Nomi.

How are dividends taxed?

When you receive dividends, the tax you pay depends on your total income and the current tax rules. Here’s how it works for the 2025/26 tax year:

• Tax-Free Dividend Allowance: You can earn up to £500 in dividends tax-free each year.

• Personal Allowance: You also have a personal allowance of £12,570, which covers all income, including dividends.

• Dividend Tax Rates: Any dividends above the £500 allowance are taxed based on your income tax band:

• Dividends received within a stocks and shares ISA are completely tax-free and do not affect your allowances.

Example to Understand Dividend Taxation

Suppose you earn £29,570 in salary and receive £3,000 in dividends in the 2025/26 tax year.

1. Add your salary and dividends: £29,570 + £3,000 = £32,570 total income.

2. Subtract your personal allowance: £32,570 - £12,570 = £20,000 taxable income.

3. Since £20,000 falls within the basic rate band, your dividend tax is calculated as:

   • No tax on the first £500 of dividends (tax-free dividend allowance).

   • Tax at 8.75% on the remaining £2,500 of dividends, which equals £218.75.

This example shows how dividends and taxable income combine to determine how are dividends taxed and how much tax you owe.

Conclusion

At dns accountants, we can assist you in paying yourself tax efficiently by taking care of all your HMRC payroll and dividend forms. You’ll receive all necessary support and advice, as well as assistance with your company’s tax return filing. Additionally, we will also prepare and file your annual self-assessment tax return.

In case you have queries or want specialist advice on "dividends and how they are taxed as per the latest dividend tax rates", kindly call dns accountants.

Disclaimer :-"This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

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