What are dividends?
Dividends are a distribution of limited company profits paid to shareholders after any expenses, taxes and liabilities are paid to reward them for their investment in the business.
How are dividends taxed?
Dividends are paid gross, with no tax deducted, and everyone is allowed to earn an amount tax free each year. In the 2024/25 tax year, you can receive £500 of dividend income, tax free.
Having been reduced from £5,000 to £2,000 in 2017, and reducing again to just £1,000 for the 2023/24 tax year, the dividend allowance of £500 in the 2024/25 tax year is a shadow of what it used to be.
The dividend tax rates are:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Dividend tax rates are lower than income tax rates. This means that with a tax efficient structuring of your remuneration through a combination of both salary and dividends, you can pay a reduced amount of tax – whilst remaining compliant and keeping more cash in your pocket.
Dividends also count towards your annual income and any amount of dividend income falling within your income tax personal allowance is also tax-free. The personal allowance is currently £12,570 and first applies to non-dividend income – i.e. from earnings or pensions.
The good news is that dividends are not subject to national insurance, which is why a combination of both salary and dividends can be the most tax efficient form of remuneration as director and shareholder of a limited company.
How do I pay myself dividends?
The company must be profit making for you to be able to withdraw dividends from your business. If the business is making a loss and has no retained profit then dividends can’t be paid. If you make a dividend payment from a loss making company, the payment would technically be a director’s loan which would need to be repaid.
Dividends can be issued at any time but shareholders and directors will generally make dividends at regularly internals, such as every month or quarter. If you are the sole shareholder in the business you can receive 100% of the dividends being paid. If there are other shareholders within the company, dividends would normally be paid out on the basis of those shareholdings. For example, if there were two shareholders who each hold 50% of the shares, each shareholder would be entitled to receive a dividend payment at the same time.
A director’s meeting must be held to declare the dividend and a dividend voucher must be produced to confirm the details of the dividend payment.
Any tax due on the dividend income received, is reported on each shareholder’s personal self assessment tax return each year. Any tax due on the dividends will then be paid by the recipients by 31 January each year.
Need help?
Our annual Director’s Salary report gives more information and examples showing how dividend tax is calculated as part of a salary and dividend remuneration package. Please contact us if you’d like a free copy.
We support our clients by making sure they pay themselves as tax efficiently as possible whilst making the process easy for them. We take care of all the HMRC payroll and ensure that help and advice is always on hand. Of course, we take care of all the company filings and the personal tax return side of things too. Please contact us if you’d like to discuss your personal tax planning then please contact us on 01386 366741 or email here and one of our advisers will be in contact.