How to calculate company 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.

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.

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.

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.