How much tax do you pay on dividend income?

UK dividend tax is a tax imposed on the dividends received by the shareholders and is payable personally by each shareholder.

Your company does not pay tax on dividend payments. But shareholders may have to pay Income Tax if they’re over £500 (the tax free dividend allowance in 2024/25)

For maximum tax efficiency, many company shareholders opt to pay themselves a low salary and then the remainder of their income in dividends. This is because the tax rate on dividends is different and at times more favourable than the income tax rate on a salary.

The other reason that paying dividends can be tax efficient is because as a director of a limited company, you are also an employee of that limited company. This means you may have to pay National Insurance Contributions (NICs) on salary payments as both an employer and employee.

This is applicable to limited companies, if you are a sole trader, you cannot pay yourself dividends as all your income is taxed as personal income and subject to standard income tax rates.

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.

The dividend tax rates in 2024/25

Example

Suppose you have earned taxable income of £35,000 and get £3000 as dividends.

You total taxable income is £38,000.

The dividend allowance is £500 which means you need to pay tax on the remaining amount of dividends of £2500. You pay a tax rate of 7.5% on £2500 of dividend as your entire taxable income is within the basic income tax band.

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band (see above).

The tax rates on dividends you will pay in 2024/25 are as follows:

The dividend tax rates in 2024/25

Dividend vouchers

When a dividend is paid to a shareholder, the company should provide a dividend voucher, which could be either a paper voucher or an electronic voucher with details as follows:

1. Company Information
2. Shareholder Details
3. Dividend Payment Details
4. Company Director’s Signature:

How you pay the tax owed on dividend income and how dividends are taxed will depend on the amount you earn in dividends in the tax year.

Up to £10,000 dividends

Tell HMRC by:

1. Calling the helpline: Helpline Number Telephone: 0300 200 3300 Outside UK: +44 135 535 9022
2. Requesting HMRC to change your tax code – the tax will be taken from your earnings or pension
3. Putting it on your Self Assessment tax return if you already fill one in

You are not required to tell HMRC once your dividends are within your dividend allowance for the tax year

Over £10,000 dividends

• You’re required to fill in a Self Assessment tax return
• If you do not generally send a tax return, you’re required to register by 5 October following the tax year you had the income.
• Once you register, you’ll then receive a letter telling you what to do next.