UK Dividend tax rates and dividend allowances
Whether you are small investor, a stockbroker or a limited company director, it’s important to understand UK dividend tax rates and dividend allowances to ensure you make the most of your investments in the most tax-efficient way.
What are dividends?
A dividend payment is a distribution of a company’s profits to the shareholders of the company. Dividends can only be paid out of profits after all costs and taxation has been deducted. A dividend paid out that results in a loss after tax is known as an illegal dividend.
What are the UK dividend tax rates 23/24?
UK dividend tax rates are as follows:
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%
At the time of writing (Feb 2024), there are no plans for changes to UK dividend tax rates 24/25. However, there is a budget on 6th March so we may update this blog after the budget if needed.
How can I earn dividend income?
If you own shares in a public limited company which is traded on the stock exchange, you may receive a dividend payout annually or quarterly. It’s also possible to own shares in a private limited company if you are a director or shareholder. You may then receive a dividend if there are sufficient profits to distribute to shareholders. These are known as limited company dividends.
Can I earn any dividend income tax-free?
Yes, there are dividend allowances which mean some of your dividend income will be free of tax. The allowances are as follows:
2022/23 £2,000
2023/24 £1,000
2024/25 £500
In addition, the personal allowance of £12,570 can also be used for dividends if you have no other income, so for 2023/24, you can earn up to £13,570 in a combination of dividends and earned income before paying any tax.
Is it better to tax dividends or a salary?
Limited companies dividends are often used by limited company directors as a more tax-efficient way to be remunerated. Many limited company directors withdraw money from their companies through a combination of a smaller salary and higher dividends. This is because the dividend tax rates are lower than income tax rates and there is no NICs payable on dividends.
Unlike employees, there’s no minimum wage threshold for directors so it is usually more tax efficient to take a salary up to the personal allowance (£12,570) and take remaining remuneration as dividends.
When can I pay myself dividends?
You can declare limited company dividends at any time as long as the dividend is being paid from profits after tax. You’ll need to hold a directors’ meeting to declare the dividends and this must be recorded in the meeting minutes. This applies even if you are the only director. You must create a dividend voucher showing the date, company name, shareholder name, and dividend paid.
When do I have to pay dividend tax?
Your dividends must be declared through your self-assessment tax return by 31st January and any tax due will be calculated alongside your income tax from earnings, property rental and other income such as interest.
Getting support for your limited company business
Taking dividends instead of a larger salary is just one way to become more tax-efficient in your business. There are a variety of other allowances that you may be able to take advantage of. Give us a call on 01322 250001 or complete our online contact form for a no-obligation chat about your situation and see how Adams Accountancy can help you keep more of your hard-earned cash.
You may also be interested in:
Sole traders vs. limited company – which is right for me?
Frequently asked questions about the director’s loan account
