Navigating the complexities of dividend tax UK is essential for individual investors and business owners.
Dividends are a source of revenue, so individuals will have to pay taxes on any dividend earnings they receive. The dividend tax rate differs from the rate of income tax that you might pay on other kinds of revenue, making things seem a bit overwhelming.
In this blog, we explain how dividends work, what you must understand about paying and reporting dividend tax, and the available tax-free allowances for dividends.
Table of contents
- What is a dividend?
- Who is eligible to get a dividend payment?
- How does a business issues dividends
- How do I calculate the tax bill on my dividend?
- How do we pay the tax on dividends?
- Types of records necessary for dividends
- Final thoughts
Key Takeaways
- Dividend allowance reduced to £500.
- Understanding dividend tax in the UK is crucial for individual investors and business owners.
- Dividend tax rates for 2024/25 are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
- Keep accurate records and stay updated on tax rate changes to ensure compliance and optimise tax liabilities.
What is a dividend?
A dividend is a payment to equity investors from a limited company’s earnings. This implies that an enterprise can only pay a dividend if it is profitable. Any payout can’t be higher than the cumulative profits of a business generated in the current and previous financial years.
Profit relates to the reserves available to distribution that the business remains with after paying all its tax obligations (including VAT, Corporation Tax, etc) and expenses (consider wages and rent for premises).
It’s unlawful to pay a dividend if your business doesn’t have sufficient available profit to cover the dividends.
Dividend payments aren’t considered a business expense compared to salaries. This means corporation tax relief is not available on dividends declared to investors.
Who is eligible to get a dividend payment?
Usually, anyone who owns a share of the business will receive a dividend payment corresponding to the number and kind of shares they own.
The stockholders might be investors in the business, but they can also be directors, employees, or relatives. Being an investor doesn’t necessarily make you a director, but it’s common for someone to be both, especially for smaller businesses.
How does a business issues dividends
Limited companies typically use the following process to declare and distribute dividends:
- Businesses should have sufficient profits available to cover the dividend payments. They can only issue dividends if it would leave the business capable of paying its expenses.
- Businesses should hold a directors’ meeting to announce the dividend and record the minutes of the discussion.
- Then, the company issues all shareholders with a dividend voucher demonstrating the amount paid, the date, and the tax deduction associated with the dividend.
- The business records the dividend payments in the business’s financial records and reports dividend payments on the business’s Corporation Tax return.
Procedures may vary for listed companies.
All dividend payments must be accurately documented because the business and individual shareholders will require this information for their personal tax returns.
How do I calculate the tax bill on my dividend?
When calculating your tax bill, HMRC will ‘stack’ your earnings by counting your earnings from work, pensions, property, savings, and dividend income.
The 2024/25 tax years dividend rates are as follows:
- 0% on the very first £500 from dividends (this is referred to as the Dividend Allowance)
- 0% if your entire income exceeds the £12,570 Personal Allowance.
- If you are a basic rate taxpayers, then the rate is 8.75%
- If you are a higher-rate taxpayer, then the rate is 33.75
- If you are an additional rate taxpayer, then the rate is 39.35%
For example, if you received £45,000 from your employment and then £9,000 from dividends, your taxation bill would look like the following:
| Income type | Amount (£) | Tax calculation | Tax (£) |
| Employment income | 45,000 | ||
| Less: Personal allowance | (12,570) | ||
| Taxable employment income | 32,430 | ||
| Basic rate (20%) | 32,430 * 0.20 | 6,486 | |
| Total employment tax | 6,486 | ||
| Dividend income | 9,000 | ||
| Less: Dividend allowance | (500) | ||
| Taxable dividend income | 8,500 | ||
| Basic rate (8.75%) | 5,270 * 0.0875 | 460.13 | |
| Higher rate (33.75%) | 3,230 * 0.3375 | 1,089.38 | |
| Total dividend tax | 1,549.51 | ||
| Total income tax liability | 8,035.51 |
How do we pay the tax on dividends?
You must report any income over the threshold of less than £10,000 to HMRC.
After that, you have two options for paying the tax: Either filling out a self-assessment tax return or requesting that HMRC change your tax code to deduct it from your pay or pension.
If you make earnings above £10,000 in dividends, then you’ll have to fill in and complete a tax return. You have to fill out this income in the dividends part of the form.
The payment can be sent to HMRC through the payment on-account system. Putting money aside with each dividend issue would be beneficial. That way, when completing your tax return, you will have funds ready, and HMRC will inform you of the tax due.
Types of records necessary for dividends
As with every facet of your taxes, keeping accurate records of your dividend income is crucial. This includes:
- Dividend vouchers demonstrating the amounts paid, tax credits, and dates
- Correspondence with businesses about your stakes and dividend payments
- Bank statements demonstrating dividend payments received
- Estimates of your dividend tax liability
- Copies of your tax documents and all correspondence with HMRC
You should keep your dividend documents for at least five years after the applicable tax year’s due date. So, for the 2024/25 taxation year, you’d need to keep documents until at least January 31st, 2031.
If you have precise and comprehensive records, filing your tax return, determining your tax liability, and responding to any HMRC inquiries will be much simpler. It’s a key part of handling your dividend tax efficiently.
Final thoughts
Knowing dividend tax in the UK is essential for optimising investment returns and guaranteeing compliance with tax laws. You can handle your dividend income and tax responsibilities by making the most of allowances, budgeting your finances, and getting expert guidance.
Also if you wish to optimise your dividend income and minimise tax liabilities, a tax accountant can help you navigate these complexities efficiently!
