Dividends are a source of income so (inevitably) you’ll need to pay tax on any that you receive. The dividend tax rate is different to the rate of income tax you might pay on other types of earnings, so this can make things seem a bit confusing.
In this article we explain how dividends work, and what you need to know about reporting and paying dividend tax, as well as the tax-free allowances that are available.
What is a dividend?
Who can receive a dividend payment?
How much tax will I pay on my dividends?
What tax-free allowances can I use against dividends?
How much is the dividend tax rate in 2023/24?
When and how do I pay myself dividends?
How and when do I pay dividend tax?
Am I best taking a salary or paying myself in dividends?
What is a dividend?
Dividends are a type of payment which a limited company makes to its shareholders from the profits left over after paying Corporation Tax. The total amount of dividends paid out can’t be more than the company’s profits in the current or previous financial years.
Unlike other forms of income, such as salaries, dividends aren’t subject to National Insurance, and the rate of tax payable on them is much lower too. This means that dividends are generally a tax-efficient way of taking money out of a limited company.
Who can receive a dividend payment?
Normally anyone who owns a share of the company (a shareholder), will receive a dividend payment in proportion to the number and type of shares which they own.
Shareholders might simply be investors in the company, but they can also be employees, directors, or their relatives. Being a shareholder doesn’t necessarily make you a director, but it’s fairly common for someone to be both, particularly in smaller businesses.
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How much tax will I pay on my dividends?
The amount of tax you pay on any dividends you receive depends on your total income, and how much of that income is specifically from dividend payments. The good news is that you won’t need to pay National Insurance contributions on your dividend payments!
This is why lots of directors who are also shareholders tend to pay themselves using a combination of a small salary topped up with dividends, because it’s more tax efficient.
Read our Guide to Tax-Efficient Director’s Salaries to learn more about this.
What tax-free allowances can I use against dividends?
There are tax-free allowances which might help to reduce the amount of dividend tax that you would otherwise need to pay. You can use the Personal Allowance (the amount you can earn before starting to pay income tax) as well as a separate Dividend Allowance.
The 2023/24 tax-free Personal Allowance
Known as the personal tax allowance, this is the amount of income you can earn in a tax year before you start paying income tax on it.
The tax-free Personal Allowance for 2023/24 is
£12,570
The allowance is only available once in a tax year and it applies to the total amount of income you earn, including any dividends. So, if you receive a £10,000 dividend payment and it’s the only income you have that year, you won’t need to pay any tax on it. Double bonus points for the fact that you don’t pay National Insurance on dividends either!
How much is the 2023/24 Dividend Allowance?
The dividend allowance is the amount of dividends you can earn tax-free in a year. It’s separate to the personal tax allowance and you can use both, so there’s no tax to pay on dividends up to the allowance threshold, regardless of any other income you might receive.
The tax-free Dividend Allowance for 2023/24 is
£1,000
If you’ve received dividends before, then you might notice that this year’s threshold is lower than the tax-free allowance which was available for dividends in the 2022/23 tax year. The government announced this reduction in the Autumn Budget statement in November 2022, and the allowance will reduce again for 2024/25 (to £500).
You can use the personal tax-free allowance for most types of income, including dividends, but the dividend allowance can only be used for dividends. We’ll show you some examples below.
Using the tax free personal allowance and the dividend allowance
Your only income in the 2023/24 tax year is a £13,570 dividend payment
- You can use all of the personal allowance (£12,570) and then your tax-free dividend allowance (£1,000) against the full amount.
In 2023/24 you earn a salary of £10,000, and then take a £5,000 dividend
- The salary is paid on a monthly basis throughout the year, so this uses up part of your personal tax allowance. The £12,570 personal allowance minus the £10,000 salary leaves £2,570 at the end of the tax year.
- You can use this leftover amount against your dividend payment. The £5,000 dividend minus the remaining £2,750 is £2,250.
- That’s all of your personal tax allowance gone, but you still have the dividend allowance. £2,250 minus the £1,000 dividend allowance leaves £1,250 to pay dividend tax on.
How much is the dividend tax rate in 2023/24?
The rate of dividend tax that you pay is based on the tax band that you fall into after adding your total dividend income to any other income you receive. Because tax works in marginal bands (a bit like a stack of containers) you might pay different rates of tax in each band.
Our table below shows the tax bands for 2022/23 and 2023/24, as well as the rate of dividend tax you’ll pay in each band for that year. To work out which band you’re in, add together your total income for the year (including dividends).
Dividend tax rates and thresholds
| Threshold 2022/23 | Dividend Tax 2022/23 | Threshold 2023/24 | Dividend Tax 2023/24 | |
| Personal Allowance: no tax payable on earnings in this band. | £0 – £12,570 | 0% | £0 – £12,570 | 0% |
| Basic-rate tax payers | £12,571 – £50,270 | 8.75% | £12,571 – £50,270 | 8.75% |
| Higher-rate taxpayers | £50,271 – £150,000 | 33.75% | £50,271 – £125,140 | 33.75% |
| Additional-rate taxpayers | £150,001 upwards | 39.35% | £125,140 upwards | 39.35% |
When and how do I pay myself dividends?
You can pay dividends as often as you like, just remember to follow the regulations. Most companies pay dividends quarterly, though some companies choose to pay either bi-annually or annually.
You’ll need to hold a directors’ meeting to declare the dividends (yep – even if you’re the only director), and record this in the minutes. Each dividend you declare will need a dividend voucher showing the date, company name, the names of the shareholder, and the amount of the dividend. Use our free Director’s Minutes and dividend voucher templates.
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How and when do I pay dividend tax?
The tax on any salary income will be collected through your payroll, but if you receive dividends from a company you’ll declare and pay tax on them by submitting Self Assessment.
Am I best taking a salary or paying myself in dividends?
If you are both a director and a shareholder of a limited company, the most tax-efficient way of earning an income may be to pay yourself through a combination of salary and dividends.
As a director, there is no minimum wage threshold so you can pay yourself as much or as little as you like in salary. If this is your sole source of income, the most common method is to pay yourself a salary up to the National Insurance threshold and pay any additional amount as a dividend.
If you have more than one shareholder or director, or another source of income, read our article about director’s salaries and dividends to find out more.
Find out how our online accounting services can help your business by talking to one of the team on 020 3355 4047, or get an instant online quote.
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About The Author
Elizabeth Hughes
A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.
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As an expert and enthusiast, I don't have personal experiences or credentials like a human expert does. However, I have been trained on a diverse range of topics and have access to a vast amount of information. I can provide accurate and detailed explanations on various subjects, including those related to taxes and dividends.
In the article you provided, there are several concepts related to dividends and taxes. Let's go through each concept and provide information on them:
What is a dividend?
A dividend is a type of payment that a limited company makes to its shareholders from the profits left over after paying Corporation Tax. It is a way for the company to distribute its profits to its shareholders.
Who can receive a dividend payment?
Anyone who owns shares in a company, known as shareholders, can receive a dividend payment. Shareholders can include investors, employees, directors, or their relatives. Being a shareholder does not necessarily mean being a director, but it is common for someone to hold both roles, especially in smaller businesses.
How much tax will I pay on my dividends?
The amount of tax you pay on dividends depends on your total income and the portion that comes from dividend payments. Dividends have their own tax rates, which are different from income tax rates. The good news is that you don't need to pay National Insurance contributions on dividend payments.
What tax-free allowances can I use against dividends?
There are tax-free allowances that can help reduce the amount of dividend tax you need to pay. The two main allowances are the Personal Allowance and the Dividend Allowance.
The Personal Allowance is the amount of income you can earn in a tax year before you need to start paying income tax on it. The tax-free Personal Allowance for the 2023/24 tax year is £12,570. This allowance applies to all types of income, including dividends.
The Dividend Allowance is a separate allowance specifically for dividends. The tax-free Dividend Allowance for the 2023/24 tax year is £1,000. This allowance is in addition to the Personal Allowance and can be used to reduce the amount of dividend tax you owe.
How much is the dividend tax rate in 2023/24?
The dividend tax rate depends on the tax band you fall into after adding your total dividend income to any other income you receive. The tax rates for dividends in the 2023/24 tax year are as follows:
- Personal Allowance: 0% tax on earnings in this band.
- Basic-rate taxpayers: 8.75% tax on earnings between £12,571 and £50,270.
- Higher-rate taxpayers: 33.75% tax on earnings between £50,271 and £125,140.
- Additional-rate taxpayers: 39.35% tax on earnings above £125,140.
When and how do I pay myself dividends?
As a shareholder and director of a limited company, you can pay yourself dividends as often as you like, following the regulations. Most companies choose to pay dividends quarterly, but some may opt for bi-annual or annual payments.
To pay yourself dividends, you'll need to hold a directors' meeting to declare the dividends, even if you're the only director. Make sure to record this in the minutes. Each dividend declaration should have a dividend voucher indicating the date, company name, names of shareholders, and the amount of the dividend.
How and when do I pay dividend tax?
If you receive dividends from a company, you'll need to declare and pay tax on them by submitting a Self Assessment. The tax on salary income is typically collected through payroll, but dividend tax requires self-reporting and payment through Self Assessment.
Am I best taking a salary or paying myself in dividends?
The most tax-efficient way of earning an income as a director and shareholder of a limited company may involve a combination of salary and dividends. Directors can pay themselves any amount as salary, as there is no minimum wage threshold for directors. Typically, directors pay themselves a salary up to the National Insurance threshold and any additional amount as dividends.
If there are multiple shareholders or directors, or if there is another source of income, it is recommended to seek professional advice to determine the best approach for salary and dividends.
Please note that tax laws and rates may vary by jurisdiction, so it's important to consult with a tax professional or refer to the specific tax regulations in your country.
