UK Dividend Tax Explained: Step-By-Step Guide

You might have heard the word 'dividends' being tossed around in business circles, but if you're new to the world of self-employment and running a limited company, you might not know exactly what a dividend is. 

So, what is a dividend, how do they help you be more tax-efficient and what are the current dividend tax rates in the UK?

What is a dividend?

A dividend is a payment made to company shareholders from the profits of a company after Corporation Tax has been accounted for. When operating your business as a limited company, the most tax-efficient way of extracting money from your company is usually via dividends. 

It’s important to remember that dividends cannot be counted as a business expense when calculating your Corporation Tax and that it’s illegal to pay a dividend if your company does not have sufficient profit after tax available to cover the dividend amount.

Any ‘retained profit’ in a limited company could have been accumulated over a number of years. If the director(s) choose not to distribute any excess profits as dividends at the end of the company’s accounting period, then the accumulated profit remains available to distribute at a later date.

Usually, the most tax-efficient way to pay yourself as a director is by taking a combination of a low salary and dividends from your limited company. The salary will be paid to you as a director, in the same way as a regular employee. We’ve got an article that explains how it all works – “How much should I take as a salary from my limited company”

How does your company issue a dividend?

If you want to issue a dividend, then you need to hold a meeting of directors to “declare” the dividend. The meeting needs to be minuted and a record kept of it. This is the case even if you are the sole director of your limited company, though it may then just be a case of issuing the correct paperwork. If you use a good online accounting software system like Crunch, then it should usually take care of all the admin for you.

For each dividend payment your company makes, you need to issue a dividend voucher that shows the following:

• date the dividend is paid

• company name

• names of the shareholders being paid a dividend

• amount of the dividend.

You should give a copy of the voucher to all recipients of the dividend amount and keep a copy for your company’s records.

Dividends should usually be distributed according to the percentage of company shares owned by each shareholder. So, If you own half the company’s shares, you should receive 50% of each dividend distribution.

Understanding tax on dividends

Your company does not need to pay tax on any dividend payments it issues, but the shareholders may have to pay tax on the dividends they receive based on their personal circumstances, through their annual Self Assessment. 

Running your business as a limited company can be a tax-efficient way to operate, as neither the company nor you as an employee will need to pay National Insurance Contributions (NICs) on dividends.

If you take a higher salary than the relevant National Insurance (NI) thresholds, both employer’s and employee’s NICs would be payable. Many limited company owners combine dividend payments with a low salary to operate their business and their personal finances tax-efficiently. You can check out our article “How much should I take as a salary?“ for further information.

HMRC, Dividend Tax, and Self Assessment

If you don't already complete an individual Self Assessment tax return, receiving dividends may mean you need to complete one. We have an article to help you see if you need to complete a Self Assessment, or you can speak to an accountant, call the HMRC helpline or use HMRC's online service to check.

‍You'll need to declare the total dividend income you've received on your Self Assessment tax return, whether the dividends come from your own limited company or another company you hold shares in. The higher your income from dividends compared to the personal tax thresholds, the higher your dividend tax rate.

If you receive dividends from companies where you aren’t a director, and you don't currently complete a Self Assessment, you can either ask HMRC to change your tax code if you are paid through PAYE, or if the amount you receive is over £10,000, you will need to start completing a Self Assessment.

The dividend tax rate you pay is based on your total income from all sources, not just on your dividend income, but we'll cover that in more detail shortly.

Understanding the annual tax-free UK Dividend Allowance

You can earn up to £2,000 in dividends in the 2022/23 tax year and £1,000 for the 2023/24 tax year, before you pay any Income Tax on your dividends, this figure is over and above your Personal Tax-Free Allowance of £12,570 in the 2023/24 and 2022/23 tax years. Want to apply this to your own expected earnings? Make use of our dividend tax calculator.

Dividend Tax Rates for the 2023/24 tax year (and the previous three tax years) in the UK

Once you’ve used up your Personal Allowance and the tax-free Dividend Allowance of £1,000 (£2,000 for the previous three years), any further dividends you receive, from any source, will be taxed.

The amount of personal tax you pay on income from dividends is based on your tax band (also known as your ‘marginal rate’). The rates of tax you pay are lower than the income tax rates, which is one of the reasons dividends are so tax-efficient for limited company directors. 

The rates for 2023/24 (the same for 2022/23) will be as follows:

• Basic-rate taxpayers pay 8.75%
• Higher-rate taxpayers pay 33.75%
• Additional-rate taxpayers pay 39.35%

The rates for the 2021/22 tax year were as follows:

• Basic-rate taxpayers pay 7.5%
• Higher-rate taxpayers pay 32.5%
• Additional-rate taxpayers pay 38.1%.

If you’re a Scottish taxpayer, although your Income Tax is based on the Scottish Income Tax Rates, you’ll need to calculate and pay any tax due on dividends (or savings income) using the UK tax rates and thresholds as shown in our article.

Dividend Tax thresholds for the 2023/24 tax year in the UK

If you’re wanting to take dividends before 5th April 2024, to know how much tax you’d need to pay when taking dividends for the 2023/24 tax year the following tax rates and tax thresholds apply after the 2023/24 personal allowance of £12,570 is used.

A simple example for the 2023/24 tax year

A company director with a salary of £9,100 (the National Insurance Secondary Threshold) and income from dividends of £50,000 will pay the following Income Tax rates in the 2023/24 tax year. The 2023/24 personal allowance is £12,570.

You can use our Crunch Personal Tax Estimator to estimate the amount of tax you should pay on your total earnings.

UK Dividend Tax thresholds for the 2022/23 tax year

In the 2022/23 tax year the following tax rates and tax thresholds apply after the personal allowance of £12,570 is used.

We've got an article with all the relevant tax rates and thresholds including annual dividend allowances for 2021/22 and 2020/21.

A simple example for the 2022/23 tax year

A company director with a salary of £9,100 (the National Insurance Secondary Threshold) and income from dividends of £50,000 will pay the following Income Tax rates in the 2022/23 tax year. The personal allowance is £12,570.

That’s more tax to pay than the same calculation for the 2021/22 tax year.

What is the maximum you can take in salary and dividends without paying Higher Rate tax?

The worked example below shows you the maximum you can take in salary and dividends from your limited company and still stay with the Basic Rate band for both the 2022/23 and 2023/24 tax years:

Note: This example is dependent on taking a salary up to the relevant National Insurance Threshold (£9,100 in the 2023/24 and 2022/23 tax years) and this being your only source of income. Our article, “How much should I take as a salary?” explains all this in detail.

If you’re not yet a Crunch client, we can make paying yourself tax-efficiently easy, with all your HMRC payroll and dividend forms taken care of. Even better, you’ll get all the support and advice you need, plus all your company tax filing taken care of. We can even prepare and file your annual Self Assessment tax return. Find out more about our great-value limited company accountancy packages, and explore an array of free online resources, including our business guides and tax calculators.