Woman in orange shirt on laptop drinking from blue mug | Tax on dividends: What do I need to pay?

Contents

  1. 1. How are dividends taxed in the UK?
  2. 2. How to issue a dividend from your company
  3. 3. How much tax do I pay on dividends?
  4. 4. How to pay tax on dividends

Tax on dividends: What do I pay?

May 17, 2023
Your business has taken off and you’re making a profit, meaning you can now pay shareholders — including yourself — in dividends.A dividend is a payment made to company shareholders from company profits after Corporation Tax has been taken into account. Emphasis on ‘profit’ — it’s illegal in the UK to pay dividends if your company isn’t making a profit.In this article, we’ll be diving into tax on dividends in the UK, from the amount you’ll be taxed, how much you can take home tax-free, and the tax rates and thresholds for the 2023/24 tax year.

How are dividends taxed in the UK?

Dividends are the most tax-efficient way to pay yourself as a business owner, but the total amount of tax you pay depends on the following factors:
    Your Income Tax bandTax-free Dividend Allowance for the tax year in questionYour Personal Allowance
Note: As self-employed sole traders keep all profits after tax, dividends can only be issued to limited company shareholders.

This way of taxing dividends is relatively new, as prior to 6th April 2016 dividends were paid with tax credits that accounted for the tax already paid by the company. You can find more on dividends before 6th April 2016 over at GOV.UK.

How to issue a dividend from your company

Before working out the tax you need to pay on your dividends, it’s good to know how to issue them in the first place.If you’re planning on issuing a dividend, you’ll need to hold a meeting of directors to ‘declare’ the dividend. This meeting must be minuted, with records kept, even if you’re the sole director of the company.For every dividend issued by the company, you’ll need to issue a dividend voucher showing the:
    Company nameDate the dividend is paidNames of the shareholders being paid a dividendAmount of the dividend
A voucher must be given to all recipients of the dividend amount, as well as a copy for your own company records.The amount each shareholder receives should be a percentage reflective of the amount they hold in shares. For example, if you hold 50% of shares in the business, you’ll receive 50% of the dividend issued.

Will the company need to pay tax on dividends?

In short, your company won’t need to pay tax or National Insurance contributions on the dividends it issues. However you, as the recipient, alongside other shareholders, will need to pay tax on the dividends you receive.

How much tax do I pay on dividends?

The amount of tax you pay is determined by the:
    Income Tax band you fall intoDividend AllowanceDividend tax ratesDividend tax thresholds

Dividend Allowance

The Dividend Allowance is the amount you can take home in dividends tax free, which for the 2023/24 tax year is £1,000. This is down from £2,000 in the 2022/23 tax year, and will be reduced to £500 in 2024/25.As dividends are a form of income, you can add your Dividend Allowance to your Personal Allowance, which for the 2023/24 tax year is £12,570. In total, you can earn up to £13,570 completely tax free.

Income Tax bands

If you’re on a salary, you’ll likely surpass your combined Dividend Allowance and Personal Allowance, meaning you’ll need to pay tax on your dividend income.The total tax you owe on the taxable income you receive from your dividends is based on the rate of tax you pay on your total income, including your dividends, salary and any other sources of income.In short, the higher your income from dividends compared to the personal tax thresholds, the higher your dividend tax rate.The UK Income Tax rates in England, Wales and Northern Ireland for 2023/24 are as follows:
Up to £12,570
BandTaxable incomeTax rate
Personal Allowance0%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £125,14040%
Additional rateOver £12,57045%
Source: GOV.UK

The Income Tax rates in Scotland for 2023/24 are as follows:
Tax bandTaxable incomeScottish tax rate
Personal AllowamceUp to £12,5700%
Starter rate£12,571 to £14,73219%
Basic rate£14,733 to £25,68820%
Intermediate rate£25,689 to £43,66221%
Higher rate£43,663 to £125,14042%
Top rateOver £125,14047%
Source: GOV.UK

Dividend tax rates and thresholds for 2023/24 tax year

Depending on the Income Tax bracket you fall into, you’ll be taxed at the following rates on any dividends you receive above your Dividend Allowance.
Tax bandTax rate on dividends over the allowance
Basic rate8.75%
Higher rate33.75%
Additional rate39.35%
Source: GOV.UK

How to pay tax on dividends

As dividends are taxed as a form of income, you’ll pay any tax you owe on dividends through your Self Assessment tax return. All you need to do is declare any income from dividends in the ‘Dividends’ section of your return.

To make your payment on the dividend tax you owe, you can use one of the following methods.
Payment methodTime to process
Online or telephone banking (Faster Payments)Same or next day
CHAPSSame or next day
Debit cardSame or next day
Credit cardSame or next day
At the Post OfficeSame or next day
At your bank or building societySame or next day
Bacs3 working days
Cheque through post3 working days
Existing Direct Debit3 working days
New Direct Debit5 working days
Rachel Cameron-Potter
Rachel Cameron-PotterContent Marketer

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