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Dividend tax

Dividends are a source of income, so inevitably you will need to report and pay tax on any you receive. The tax rate for dividends is different from what you may pay on your regular income, which can make them confusing. In this blog post, we will explain exactly what dividends are, what they entail, and how they are tax-efficient.

What is a dividend?

A dividend is a payment made by a limited company to its shareholders, to distribute the profits generated in a period after paying Corporation Tax. It's essentially a way for shareholders to receive a portion of the company's earnings. The total amount of dividends paid out cannot exceed the company's profits in the current year plus any retained earnings from previous periods. This is how you can get caught out by having an overdrawn director's loan account, as you could end up taking more money from the company than you can legally declare dividends for. See more on this in our video: Director's Loan Accounts | What are they? (

Dividends are paid out based on the number of shares held by shareholders. For example, if your company had one shareholder who owned 2 shares, and another who owned 1 share and you wanted to issue a £9,000 dividend, the first shareholder would receive £6,000, and the other would receive £3,000.

What tax do I pay on dividends?

The amount of tax you pay on your dividends depends on your total income and is calculated via a yearly tax return.

You can use your personal allowance against your dividend payments- in the 2024/25 tax year, the allowance is £12,570. This is the amount of money, including dividends, you can earn before you start paying income tax.

If you use your total personal allowance, you can also apply the dividend allowance. This is an additional allowance that reduces your taxable dividends, so there is no tax to pay on any dividends up to the allowance threshold. For the 2024/25 tax year, this threshold is £500.

Example: you receive £15K in dividends in the 2024/25 tax year, with no other income.

  • You deduct your personal allowance of £12,570, leaving you with £2,430

  • You then deduct your dividend allowance, leaving you with £1,930

  • You would need to pay tax on the remaining £1,930.

Example 2: you receive £15K dividends in the 2024/25 tax year, and also a £10,000 salary

  • You deduct your personal allowance from your salary first, which leaves no taxable employment income and £2,570 of your personal allowance remaining

  • You deduct the £2,570 remaining allowance from the dividends, leaving £12,430

  • You then deduct the £500 dividend allowance, which leaves £11,930

  • You then pay tax on £11,930 of dividends

The rate of dividend tax you pay depends on the tax band you fall into based on your total income for the tax year.

Threshold 2024/25 (£)

Dividend tax rate

Personal Allowance:

0 - 12,570


Basic Rate:

12,571 - 50,270


Higher Rate:

50,271 - 125,140


Additional Rate:

125,141 or more


How is declaring dividends tax efficient?

Dividend tax, as stated above, is paid at a lower rate than income tax, which makes it more tax efficient than solely taking a salary from the company. As a director, there is no minimum wage threshold so you can pay yourself as little as you want through payroll.

The most tax-efficient way is to pay yourself a salary up to the national insurance threshold and top up your income with dividends. This threshold is £9100 if you are the only employee on the payroll, and £12,570 for two or more employees. This is because you can claim the employment allowance if you have two or more people on payroll, which nets off your employer's NI obligations (up to £5000).

However, suppose the company is not making enough profits to generate sufficient dividends. In that case, it may be worthwhile to put yourself on a higher salary to prevent building up an overdrawn directors loan account. This is why it's always important to talk to your accountant about which remuneration method would be best for your business, as it depends on a lot of different factors!

Check out our video on this, linked below, for more in-depth info!

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