When a limited company makes a profit in the financial year, its directors have the option to share that profit among their company’s shareholders using payments known as ‘dividends.’
In the UK, dividends are subject to both a tax-free allowance and a different variable tax rate when compared to regular income tax. This makes dividends of tax-efficient benefit to limited company directors and stakeholders.
Follow our expert guide to dividends for limited companies to discover how much of your dividends will be considered tax-free, how much tax you’ll be obligated to pay on dividends above this tax-free allowance, and how to make dividend tax work to your benefit.
How much dividend is tax-free?
Limited companies may only declare dividends if they’ve made a profit, and may only share dividends up to the value of that profit after Corporation Tax has been deducted. In 2016, the UK government first introduced a tax free allowance of £5,000 on dividends paid to company shareholders. This meant that recipients paid zero tax on the first £5,000 of their dividend income.
Since 2016, however, the tax-free allowance on UK dividends has been falling. Most recently, Chancellor of the Exchequer Jeremy Hunt announced a new series of cuts to the dividend tax-free allowance. As of the current 2023-24 financial year, the dividend allowance is £1,000, though this will be halved again, to £500, from April 2024. This follows similar reductions in allowances on things like capital gains tax on second homes.
Exploring the benefits of dividend tax for limited company owners and shareholders
Despite the recent reductions in tax-free dividend allowance, the unique rates applied to the taxable portion of your dividends still makes them a more profitable form of income. Sometimes termed ‘unearned income,’ the tax-savvy director of a limited company can opt to take a portion of their income in dividends – provided the company earns enough profit to cover them.
By combining a lower salary with higher dividends, directors of limited companies may be able to pay less income tax than they would otherwise. Similarly, shareholders in limited companies benefit from the tax-free allowance on dividends, as well as the lower tax rates on any dividends they receive above the allowance.
How to issue dividends as a limited company director
Dividends must usually be paid to all shareholders, though the amount paid is not dictated by HMRC; instead, dividends are typically divided according to the percentage of the company each shareholder owns. For example, a shareholder in control of 32% shares of a limited company declaring £100,000 in dividends could normally expect to receive £32,000.
HMRC does, however, set clear rules for how dividends must be declared and recorded.
- You must hold a directors’ meeting at which you ‘declare’ dividends
- You must keep precise minutes of the meeting, regardless of how many directors there are in our company (i.e., if you’re the only one)
- You must write a dividend ‘voucher’ for each dividend payment the company makes. This voucher must include the following information, and a copy must be both given to the dividend recipient and kept for your company records:
- Date
- Name of company
- Name of shareholder(s) receiving the dividend
- Amount of the dividend
Dividend declarations form an important part of the ‘Director’s report’ section of your limited company’s statutory accounts.
Calculating your dividend tax-free allowance
It is important to note that dividends are counted, alongside your salary, as part of your income. As such, there are two tax-free allowances which affect them: the current dividend tax allowance of £1,000 (£500 as of April 2024), and the current personal allowance on income of £12,570. Your dividend tax allowance would only affect the amount of the dividend which exceeded your personal allowance if your other income fell below £12,570.
To give an example, if you earn £10,000 in salary and £4,000 in dividends, your dividend allowance would apply to the £1,430 over your personal allowance. Thus, you would only be taxed on £430.
The rate of tax you pay on dividends above this allowance can then vary depending on various factors.
Paying tax on dividends
Limited companies don’t pay any tax on the dividends they pay out, but recipients will be obligated to pay HMRC tax on any dividends exceeding the allowance threshold.
The amount of tax shareholders pay on dividends depends on their income tax bracket, which itself may be impacted by the addition of dividends to salary.
Once calculated, paying tax on dividends may also require you to fill-out a Self Assessment Tax Return, even if you are an employed person whose taxes are usually filed by your employer.
Calculating tax on dividends
Dividend which exceeds the tax-free allowance and, once added to your wages, also exceeds your personal allowance, is subject to tax by HMRC. The rate at which your dividend income is taxed depends on your income bracket. To determine your income bracket, add your dividend income to any other income. Be aware that you will pay different rates on this combined income.
| Income bracket | Tax rate on income | Tax rate on dividends |
| Basic rate (£12,571 to £50,270) | 20% | 8.75% |
| Higher rate (£50,271 to £125,140) | 40% | 33.75% |
| Additional rate (over £125,141) | 45% | 39.35% |
Let us explain the rate of dividend tax a little more clearly with two examples, one from a basic rate taxpayer and one from a higher rate taxpayer.
Basic rate taxpayer’s example dividend tax allowance and income tax bill
Example A earns £20,000 per annum in wages and £4,000 in dividends. Their combined income of £24,000 puts them squarely in the middle of the basic rate taxpayer bracket. Their tax rates and allowances (personal and dividend) can be broken down like so:
| Income amount | Type of income | Rate of income tax | Tax amount |
| First £12,570 | Salary | Personal allowance, 0% | £0 |
| Next £7,430 | Salary | Basic rate, 20% | £1,486 |
| First £1,000 | Dividend | Dividend allowance, 0% | £0 |
| Next £3,500 | Dividend | Basic rate, 8.75% | £306.25 |
| Total tax to pay HMRC | £1,792.25 | ||
Higher rate taxpayer’s example dividend tax allowance and income tax bill
Example B, the director of their own limited company, pays themself £10,000 per annum in wages and £75,000 in dividends. Their combined income of £85,000 puts them in the higher rate income bracket. Their tax rates and allowances (personal and dividend) could be broken down like so:
| Income amount | Type of income | Rate of income tax | Tax amount |
| First £10,000 | Salary | Personal allowance, 0% | £0 |
| Next £2,570 | Dividend | Personal allowance, 0% | £0 |
| Next £1,000 | Dividend | Dividend allowance, 0% | £0 |
| Next £36,700 | Dividend | Basic rate, 8.75% | £3,211.25 |
| Next £34,720 | Dividend | Higher rate, 33.75% | £11,718 |
| Total tax to pay HMRC | £14,929.25 | ||
Paying tax on dividends over £1,000 and less than £10,000
Tax on dividends which are more than £1,000 (the current tax-free dividend allowance) but less than £10,000 can be paid one of two ways.
- You can ask HMRC to change your tax code to reflect the dividends
- HMRC will then deduct dividend tax owed from your wages or pension
- You can declare the dividend(s) on a Self Assessment Tax Return
Paying tax on dividends over £10,000
Tax on dividends greater than £10,000 must always be declared and paid via a Self Assessment Tax Return. Professional accountancy advise is highly recommended when completing an HMRC tax return for the first time.
Making the most of your limited company’s dividend potential with UWM Accountants
Hopefully our guide to how tax you pay on dividends has helped you better understand current and future dividend allowances in the UK, as well as how to calculate the tax you should be paying on the dividends you receive.
The examples we’ve used in this article help to illustrate the complexities inherent in declaring and sharing a dividend as a limited company. And yet, they also show how it can be possible to pay a lower tax rate on income gathered through dividends when compared to that earned as salary.
To ensure your role as shareholder or director of a limited company is as tax-efficient as possible, reach out to your local experts in personal and business tax, UWM Accountants.
