Dividends: How much tax will I pay?

So you're a shareholder in your own business and you're thinking about paying yourself a dividend, but you're not sure what that means for your own tax or the companies. You don't know if you owe any tax, how much it might be or even when you need to pay it. Don't worry, we at A D Accounts Limited can help.

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Lets start at the beginning, what is a dividend?

A dividend is a payment from a company to its shareholders. The payment can only be made from the retained profits of the company after Corporation tax has been paid. Usually as a director, a combination of a low salary and dividends is the most tax-efficient way of getting money out of the company and in to your hands.

As the dividends are paid out of post-tax profit, the dividend itself will not count as a buisness expense when calculating your Corporation tax.

What tax do you pay on dividends?

Firstly, we should establish who pays the tax.

The company does not need to pay tax on the dividend payment, instead it is the responsibility of the shareholders to pay any tax that may arise based on their own personal circumstances. You do this through the self assessment tax return submitted each year.

There are no National Insurance Contributions (NIC) to be paid from either the company nor the employee.

Dividends are subject to Income tax though and they are taxed at different rates depending on your total dividend income and total other income. The more dividends you recieve, when comparing them to the personal tax thresholds, the higher your dividend tax rate.

Annual tax-free UK Dividend Allowance

In the 2023/24 tax year you can receive up to £1,000 (£500 in 2024/25) in dividends before you need to pay any income tax. This is in addition to your tax-free Personal Allowance of £12,570.

Dividend Tax Rates

If you use up your Personal Allowance and the tax-free Dividend Allowance the following rates will apply on all dividends received.

	Threshold	2023/24	2024/25
Personal Allowance	£0 - £12,570	0%	0%
Basic-rate	£12,571 - £50,270	8.75%	8.75%
Higher-rate	£50,271 - £125,140	33.75%	33.75%
Additional-rate	£125,141+	39.35%	39.35%

The rate you pay is based on your tax banding which will include all sources of income for the year.

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An example for 2023/24 tax year

You are a sole company director and shareholder with a salary of £9,100 and income from dividends of £60,000. You have no other sources of income and your personal allowance is the standard £12,570.

Income	Source	Tax rate	Tax due
First £9,100	Salary	Personal Allowance	£NIL
Next £3,470	Dividends	Personal Allowance	£NIL
Next £1,000	Dividends	Tax-free Dividend Allowance	£NIL
Next £36,700	Dividends	Basic-rate of 8.75%	£3,211.25
Next £18,830	Dividends	Higher-rate of 33.75%	£6,355.13
		Total income tax due	£9,566.38

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When is the tax due?

As the dividend tax due forms part of your total self assessment tax liability, it is due 31 January 2025 for the 2023/24 tax year.

However, with self assessment there are usually payments on account that need to be paid as well. These are tax payments made in advance towards your tax bill twice a year (31 January and 31 July). This means that you could also need to make an additional payment for the 2024/25 first payment on account by 31 January 2025 and the second payment by 31 July 2025.

How can A D Accounts Limited help?

The best way to keep on top of dividends and the tax due is to plan ahead, get in touch with us today to find out how we can help you and your business so you don't have to stay up late worrying about large unexpected tax bills.

Contact us