Tax on Dividends UK: All You Need to Know for 2024-25

Understanding how tax on dividends works is essential for anyone running a business or working as a contractor in the UK. Dividend taxes can profoundly influence business decisions and personal finances. Knowing the rules behind this tax ensures you’re paying the correct amount and avoiding any potential penalties. 

This guide provides a straightforward breakdown of the tax rates, allowances, deadlines, and what you need to do to stay compliant. It does not contain confusing jargon or unnecessary explanations—just the essential facts about tax on dividends UK you need to manage your dividend income confidently.

Understanding dividend tax in the UK

If you’re a shareholder in a company, you may receive dividend payments as a portion of the company’s profits. But did you know that you may have to pay dividend tax on this income?

In the UK, dividend tax is a tax on the dividend income you receive above a certain allowance. It’s important to understand how dividend tax works and how it affects your overall income tax liability.

What is dividend tax?

A dividend tax is a tax on the dividend payments you receive from owning shares in a company. If you receive dividend income above your dividend allowance, you must pay tax at the applicable dividend tax rates.

As a shareholder, you earn a portion of the company’s profits. The company pays corporation tax on its profits, and then distributes some of the after-tax profits to shareholders as dividends. You then have to pay tax on these dividends based on your income tax band.

How dividend tax works

The dividend tax you pay depends on two key factors: your total income (including dividends) and your dividend allowance for the tax year.

The dividend allowance for the 2024/25 tax year is £500. This means you can earn up to £500 in dividends without paying any tax on them. However, this allowance has been reduced from the previous £1,000 allowance in the 2023/24 tax year.

Any dividend income above your allowance is taxed at the following rates:

To determine which tax band your dividends fall into, you need to add your total dividend income to your other taxable income, such as from employment or self-employment.

Dividend allowance

The dividend allowance is the income you can earn each year before you start paying tax. For the 2024/25 tax year, it is set at £500.

It’s important to note that the dividend allowance is not tax-free allowance like the Personal Allowance. Instead, it’s a zero-rate band, meaning you pay 0% tax on dividends up to £500. But dividends still count towards your total taxable income.

Here’s a table of the UK dividend allowance from 2016 to 2025:

If your dividend income exceeds the allowance, you’ll pay tax on the excess at the applicable dividend tax rates. And if your total income (including dividends) is high enough, it could push you into a higher tax band, leading to more tax on your dividends.

Tax rates on dividends

For the 2024/25 tax year, the tax rates on dividends are as follows:

• 0% on the first £500 of dividend income (the dividend allowance)
• 8.75% on dividends within the basic rate band (£12,571 to £50,270)
• 33.75% on dividends within the higher rate band (£50,271 to £150,000)
• 39.35% on dividends above the additional rate threshold (over £150,000)

These rates are higher than in previous years, following changes announced in the government’s Autumn Statement. The increased rates are aimed at raising more tax revenue from dividend income.

When calculating your dividend tax, you first use your Personal Allowance (£12,570 for most people) on your other income. Your dividend allowance, and then start paying dividend tax on the remainder.

Dividend tax for limited companies and sole traders

The way dividend tax works can differ depending on whether you operate as a limited company or as a sole trader. It’s important to understand the implications for your specific business structure.

Dividend tax for limited companies

If you run your business through a limited company, you can pay yourself a salary, dividends, or a combination of both. Many company directors opt for dividends as a tax-efficient way to extract profits, as dividends are taxed at lower rates than salary and don’t incur National Insurance contributions.

As a company shareholder, you’ll pay dividend tax on any dividends above the £500 dividend allowance. The company itself doesn’t pay tax on the dividends it issues, as it has already paid Corporation Tax on its profits.

When issuing dividends, the company should provide each shareholder with a dividend voucher showing the amount paid and the associated tax credit. You’ll need this information to complete your Self Assessment tax return.

Need to know more about dividend tax for limited companies? Sleek’s Limited Company Accounting takes the hassle out of dividend management. We handle the calculations, track your allowances, and ensure you stay compliant.  Focus on growing your business while we take care of the tax details.

Dividend tax for sole traders

As a sole trader, you don’t pay yourself a salary or dividends. Instead, all your business profits are treated as your personal income and taxed through the Self Assessment system.

You’ll pay income tax on your profits at the usual rates (20%, 40%, or 45%), plus Class 2 and Class 4 National Insurance contributions. There’s no dividend allowance or tax rate for sole traders, as you’re not receiving dividends from a company.

However, if you also own shares in a company and receive dividends from those shares, you’ll need to pay dividend tax on that income separately, just like any other shareholder.

Need a clearer picture of how your business income is taxed? Sole traders don’t have dividends traditionally, but understanding the dividend allowance can still help with tax planning.

Sleek’s tools for sole traders simplify tracking your income and expenses, ensuring you have a clear picture of your taxable business profits at any time. We’ll help you understand how the dividend allowance impacts your tax liability, making tax season less of a headache.

Paying dividends as a company

If you run a limited company and want to pay dividends to shareholders, there are a few key steps to follow:

1. Ensure the company has sufficient profits available to cover the dividend payments. You can’t issue dividends if it would leave the company unable to pay its bills.
2. Hold a directors’ meeting to declare the dividend, and keep minutes of the meeting.
3. Issue each shareholder with a dividend voucher showing the amount paid, the date, and the tax credit associated with the dividend.
4. Record the dividend payments in the company’s accounting records.
5. Report the dividends on the company’s Corporation Tax return.

It’s important to keep accurate records of all dividend payments, as both the company and individual shareholders will need this information for their tax returns.

Dividend vouchers

A dividend voucher is an important dividend payment record from a company to a shareholder. It shows:

• The name of the company paying the dividend
• The name and address of the shareholder receiving it
• The date the dividend was paid
• The amount of the dividend
• The tax credit associated with the dividend (if applicable)

Dividend vouchers are essential for shareholders to complete their Self-Assessment tax returns accurately. As a shareholder, you should keep your vouchers safe and ensure the information matches what you report on your tax return.

If you don’t receive a dividend voucher for a dividend payment, contact the company to request one. You’ll need it to calculate your dividend tax liability correctly.

Calculating and paying dividend tax

Calculating and paying your dividend tax correctly is a key part of managing your tax affairs. Here’s what you need to know.

Calculating your dividend tax

To calculate your dividend tax for the 2024/25 tax year, follow these steps:

1. Add up all your dividend income for the tax year.
2. Subtract the £500 dividend allowance.
3. Add your remaining dividend income to your other taxable income.
4. Calculate how much of your dividend income falls into each tax band, based on your total taxable income.
5. Apply the relevant dividend tax rates to calculate the tax due on each portion of your dividend income.

Here’s an example:

Let’s say you have a salary of £35,000 and receive dividends of £20,000 in the 2024/25 tax year.

First, deduct the £12,570 Personal Allowance from your salary. This leaves a taxable salary of £22,430, which uses up your basic rate band.

Next, deduct the £500 dividend allowance from your dividend income, leaving £19,500 taxable dividends. The first £2,840 of this falls into the remaining basic rate band (taxed at 8.75%), and the remaining £16,660 is in the higher rate band (taxed at 33.75%).

So your dividend tax would be:

• £248.50 in the basic rate band (£2,840 x 8.75%)
• £5,622.75 in the higher rate band (£16,660 x 33.75%)
• Total dividend tax: £5,871.25

This is just an example – your own calculation will depend on your specific income and circumstances.

Paying dividend tax

The way you pay your dividend tax depends on the amount of dividend income you receive:

• If your dividend income is less than £10,000, you can ask HMRC to change your tax code so the tax is collected through PAYE on your salary or pension. Alternatively, you can fill in a self-assessment tax return.
• If your dividend income is £10,000 or more, you must complete a self-assessment tax return to declare and pay the tax due.

The deadline for paying dividend tax through Self-Assessment is January 31st following the end of the tax year. So, for the 2024/25 tax year, the payment deadline would be January 31st, 2026.

Budgeting for your dividend tax bill is important and ensuring you have funds available to pay it on time. Late payment can incur interest and penalties from HMRC.

Dividend tax and your tax return

If you need to complete a self-assessment tax return, you must include all your taxable dividend income for the year, even if tax has already been deducted from the source.

You’ll need to fill in the ‘Dividends’ section of the tax return (SA100, Part 4). This is where you declare your total dividend income, any tax already paid on it, and calculate the additional tax due.

Make sure you have all your dividend vouchers to hand when completing your tax return. These will show the amounts you’ve received and any tax credits. If you’re missing any vouchers, contact the relevant companies to get copies.

Remember, the deadline for submitting your Self Assessment tax return online is January 31st following the end of the tax year. So for the 2024/25 tax year, your tax return would be due by January 31st, 2026.

Keeping Records of Dividends

As with any aspect of your taxes, keeping good records of your dividend income is crucial. This includes:

• Dividend vouchers showing the amounts paid, dates, and tax credits
• Correspondence with companies about your shareholdings and dividend payments
• Bank statements showing dividend payments received
• Calculations of your dividend tax liability
• Copies of your tax returns and any correspondence with HMRC

You should keep your dividend records for at least 5 years after the January 31st Self-assessment deadline for the relevant tax year. So, for the 2024/25 tax year, you’d need to keep your records until at least January 31st, 2031.

Having complete and accurate records will make it much easier to fill in your tax return, calculate your tax bill, and answer any queries from HMRC. It’s a key part of managing your dividend tax effectively.