Dividend Tax: All You Need to Know About Bands & Allowance

In this article, we’ll explore what dividends are and how you can earn money if you own shares in a company, plus the current dividend tax rates and thresholds in the UK for the year 2023/24, which runs from the 6th of April 2023 to the 5th of April 2024.

What is a Dividend?

Dividends are payments made to shareholders from the profits of a company after Corporation Tax has been deducted. They cannot be counted as a business expense and it’s illegal to pay dividends if your company doesn’t have sufficient profits after tax to cover the dividend amount. Companies do not need to pay tax on any dividend payments they issue, but shareholders have to. The total dividends distributed can’t exceed the company’s profits in the current or previous financial years.

You may get a dividend payment if you own shares in a company and, as dividends are a form of income, they’re subject to tax, just like any other income you earn. But, unlike income sources like salaries, dividends aren’t subject to National Insurance contributions, and they’re taxed at a significantly lower rate.

That’s why dividends can be an efficient way of withdrawing funds for limited company directors. However, it’s important to note that the dividend tax rate differs from the income tax rate applied to other earnings, which can be confusing at times when it comes to reporting and paying dividend tax.

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Who Can Receive Dividend Payments?

Normally, shareholders from a company will receive dividend payments based on the number and type of shares they own.

Shareholders can include investors in the company, as well as staff, directors, or their relatives. It’s important to consider that owning shares of a company doesn’t automatically make one a director, although it’s quite common for someone to hold both roles, especially in smaller businesses.

In a limited company, the director(s) can decide to not distribute any excess profits as dividends at the end of the company’s accounting period. These ‘retained profits’ accumulated over a number of years remain available for distribution at a later date.

How Do Companies Issue Dividends?

Companies can issue dividends after holding a meeting of directors to formally declare the dividends, and record this in the minutes. Even sole directors have to document the necessary information. For each dividend payment the company makes, it is required to issue a dividend voucher showing the date, company name, names of the shareholder and the amount of the dividend. You can use our award-winning accounting software Xero to simplify this process by automating these tasks.

Make sure each shareholder has a copy of the dividend voucher and keep a copy for your company’s records. These steps are needed as an audit trail should you ever be investigated by HMRC, and will also be required for preparing personal tax returns for shareholders.

Usually, dividends should be distributed based on the percentage of company shares owned by each shareholder. For instance, if you own 30% of the company's shares, you would expect to receive 30% of the dividends issued by the company.

How Are Dividends Taxed for Company Directors?

Taking funds for a limited company through dividend payments is still the most tax-efficient way to pay yourself as a director. This is because dividends are exempt from National Insurance Contributions (NICs) and are taxed at lower rates than income from a salary. Not only that, as a director, there’s no minimum wage threshold so you have the flexibility to determine your own salary. If your salary is your main source of income, a common approach is to pay yourself a salary up to the National Insurance threshold and pay any additional earnings as dividends.

As such, it comes as no surprise that many company directors choose to take most of their income in the form of dividends. However, it’s important to note that directors, being shareholders of the company, are still liable to pay Income Tax on dividend payments.

If you’re a limited company director, you’ll have to file a Self Assessment to let HMRC know about any dividend income you’re received from your company. If you’re unsure about how to complete a Self Assessment, chat to one of our advisors.

Dividend Tax Thresholds for the 2023/24 Tax Year

If you’re wanting to take dividends before 5th April 2024, and know how much tax you’d need to pay when taking dividends for the 2023/2024 tax year, the following tax rates and thresholds come into effect after the 2023/2024 personal allowance of £12,570 is used.

 

	Dividend Tax Rate	From	To
Basic Rate	8.75%	£1,000	£36,000
Higher Rate	33.75%	£36,701	£125,140
Additional Rate	39.35%	£125,140+

 

Dividend Tax Rates for the 2023/24 Tax Year

The tax rates for dividends are generally lower than those for regular income, making them a tax-efficient option for limited company directors.

For the tax years 2023/2024, the dividend tax rates are as follows:

• Basic-rate taxpayers are subject to a rate of 8.75%.
• Higher-rate taxpayers are subject to a rate of 33.75%.
• Additional-rate taxpayers are subject to a rate of 39.35%.

 

	Thresholds 2023/2024	Dividend Tax Rate 2023/2024
Personal Allowance: no tax payable on income in this band	£0 – £12,570	0%
Basic-rate taxpayers	£12,571 – £50,270	8.75%
Higher-rate taxpayers	£50,271 – £125,140	33.75%
Additional-rate taxpayers	£125,140 upwards	39.35%

 

If you’re a Scottish taxpayer, while your Income Tax is based on the Scottish Income Tax Rates, you’re required to calculate and pay any tax due on dividends (or savings income) using the UK tax rates and thresholds.

How Much Tax Will I Pay on My Dividends?

If you own shares in a company, you may get a dividend payment and you can earn some dividend income each year without paying tax. The amount of tax you pay on any dividends depends on your total income, and how much of that income derives from dividend payments.

The good news is that you won’t need to pay National Insurance contributions on your dividend payments and you don’t pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).

You also get a dividend allowance each year and you only have to pay tax on any dividend income above that allowance.

How Much is the Dividend Tax-Free Allowance?

In the 2022/2023 tax year, you can earn up to £2,000 in dividends before you pay any Income Tax. For the 2023/2024 tax year, this threshold has been halved to £1,000 meaning that any shareholder receiving over £1,000 in dividends will be liable to pay dividend tax on the excess at their marginal rate.

Tax-Free Personal Allowance for the 2023/2024 Tax Year

Besides the dividend allowance, you can also use your Personal Allowance (the amount you can earn before starting to pay income tax). The tax-free Personal Allowance for 2023/2024 is £12,570. The allowance is only available once in a tax year and covers your total income, including dividends. So, if you receive a £9,000 payment as your sole income for the year, you won’t be required to pay any tax on it.

Bear in mind that you can use the personal tax-free allowance for most types of income, including dividends. However, the dividend tax-free allowance can only be used for dividends. Once you’ve used up your Personal Allowance and the tax-free Dividend Allowance of £1,000 (£2,000 for the previous three years), any further dividends you receive, regardless of the source, will be subject to taxation.

When Do I Pay Myself Dividends?

You can pay dividends as often as you like, as long as you follow the regulations. While many companies opt for quarterly dividend payments, some may choose to pay either bi-annually or annually.

When Do I Pay Dividend Tax?

Any tax on salary income is deducted through your payroll system, but if you receive dividends from a company, you’re responsible for declaring and paying tax on them by submitting a Self Assessment.

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