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How much tax do you pay on dividend income?

What is a dividend?

A dividend is money that a Limited Company pays to its shareholders. It is a distribution of a portion of a company's profits to its shareholders.

Dividends do not change the fundamental value of a company's shares and the payment must be approved by the shareholders and can be structured as a one-time special dividend, annual dividend payments, quarterly or monthly as ongoing payments.

It is very important for a company to comply with the law while deciding on the dividend policy and it is advisable to hold board meetings so that everybody is in agreement of the declaration and it is recorded the minutes of the meeting for future reference.

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What is dividend tax?

A dividend tax is a tax imposed on the dividends received by the shareholders and is payable personally by each shareholder.

Your company does not pay tax on dividend payments. But shareholders may have to pay Income Tax if they’re over £500 (the tax free dividend allowance in 2024/25)

For maximum tax efficiency, many company shareholders opt to pay themselves a low salary and then the remainder of their income in dividends. This is because the tax rate on dividends is different and at times more favourable than the income tax rate on a salary.

The other reason that paying dividends can be tax efficient is because as a director of a limited company, you are also an employee of that limited company. This means you may have to pay National Insurance Contributions (NICs) on salary payments as both an employer and employee.

This is applicable to limited companies, if you are a sole trader, you cannot pay yourself dividends as all your income is taxed as personal income and subject to standard income tax rates.

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How much dividend tax will I pay?

Receiving dividends will affect your overall tax liability.

Dividend tax is calculated according to an individual’s total taxable income and the income tax band they fall within (see below). Total taxable income includes things like salary, dividends, bank interest, interest from investments and other income from other sources such as rental income.

For the 2024/25 tax year, dividend tax rates range from 0% up to 39.35%, and your marginal rate of dividend tax is linked to your income tax band.

What is dividend tax allowance?

The tax free ‘dividend allowance’ (the amount of dividend you can pay tax free) is applied to the first £500 of dividend income for tax year 2024/25. Meaning you can earn £500 in dividend payments before you pay any tax on them. Over successive years, the dividend tax free allowance has been continually cut by various Chancellors.

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What are the dividend tax rates for 2024/25?

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.

Tax band Tax rate on dividends over the allowance

Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%

Example

Suppose you have earned taxable income of £35,000 and get £3000 as dividends.

You total taxable income is £38,000.

The dividend allowance is £500 which means you need to pay tax on the remaining amount of dividends of £2500. You pay a tax rate of 7.5% on £2500 of dividend as your entire taxable income is within the basic income tax band.

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How to calculate dividend tax

Dividend tax that you pay depends on your dividend earnings and the income tax bracket you fall into.

If your dividends received are over and above tax-free dividend allowance, then the tax on the dividend is paid at rates set by HMRC. Since the dividend tax rate is directly related to your income tax band, it is important to understand how it works.

Income tax rates and bands

The table shows the tax rates you pay in each income tax band a standard Personal Allowance of £12,570.

Band Taxable income Tax rate

Amount in £
Tax Free Personal allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £125,140 40%
Additional rate over £125,140 45%

For example, Suppose Sandra receives a dividend income of £14000 and £7600 from other sources, calculate how much will be the dividend tax amount?

Income Amount in £
Income from other sources 7,600
Dividend income 14,000
Total dividend income (7,600 + 14,000) 21,600
Personal allowance 12,570
Total Dividend Income – Personal allowance (21,600 – 12,570) 9,030
Dividend Allowance 500
Net earning 8,530

Since her earnings are well within the basic threshold, she will pay dividend tax at the rate of 7.5% i.e.£8,530 * 7.5% = £639.75 will be tax on her dividend earning.

*For Scotland the principle is the same, however the Scottish tax bands and rates are slightly different.

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Which dividend tax rate will apply to me?

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band (see above).

The tax rates on dividends you will pay in 2024/25 are as follows:

Tax band Tax rate on dividends over the allowance

Basic rate 8.75%
Higher rate 33.75%%
Additional rate 39.35%

Dividend vouchers

When a dividend is paid to a shareholder, the company should provide a dividend voucher, which could be either a paper voucher or an electronic voucher with details as follows:

  1. Company Information
  2. Shareholder Details
  3. Dividend Payment Details
  4. Company Director’s Signature:
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How you pay tax on dividends?

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How you pay the tax owed on dividend income will depend on the amount you earn in dividends in the tax year.

Up to £10,000 dividends

Tell HMRC by:

  1. Calling the helpline: Helpline Number Telephone: 0300 200 3300 Outside UK: +44 135 535 9022
  2. Requesting HMRC to change your tax code – the tax will be taken from your earnings or pension
  3. Putting it on your Self Assessment tax return if you already fill one in

You are not required to tell HMRC once your dividends are within your dividend allowance for the tax year

Over £10,000 dividends

  • You’re required to fill in a Self Assessment tax return
  • If you do not generally send a tax return, you’re required to register by 5 October following the tax year you had the income.
  • Once you register, you’ll then receive a letter telling you what to do next.

Conclusion

Tax on dividends can be calculated using our online dividend tax calculator here.

Dividend distribution is normally split according to the percentage of the company shares owned by each shareholder, which means that if you own half of the company shares you should get fifty percent of each dividend distribution.

Dividends to be paid out must be agreed by all the directors of the company and noted. For an effective dividend distribution, each shareholder should be provided with a dividend voucher with all required details like name of the shareholders, their contribution in terms of number of shares, their name and address, the net dividend being paid etc.

Calculating tax can be complex, especially if your total income is from multiple sources. It's often better to outsource your tax calculations to an established accounting firm with years of experience in accounting and taxation like dns accountants.

Our experienced team of accountants and tax advisors help thousands of individuals every year with all aspects of personal tax compliance, tax planning and also advise companies on corporate tax planning.

Our highly experienced tax team can help you with all your personal, corporate and inheritance tax planning needs. Our wide range of tax services include:

"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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Answers to dividend tax’s most frequently asked questions

Answers to

The tax on dividend income is quite confusing to calculate. People usually think, " Is there any tax on dividends we need to pay?" You can also consult with your accountant for how much tax do you pay on dividend income. The UK dividend tax rates are as follows:

  • Basic rate are 8.75%
  • Higher rate are 33.75%
  • Additional rate are 39.35%

The dividend tax free allowance is £1,000 for the 2023/24 tax year.

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