If you are a limited company shareholder, you may have to pay tax on any dividend income you receive. Here we explain how company dividends are taxed and how to calculate the amount of tax due on dividend income.
Any income you receive in the form of company dividends is taxed separately to income you get in the form of salary or pension.
All company dividends – whether they are from stock market listed firms or your own limited company – are taxed in the same way.
One important point to note is that no tax is due on any dividends received from shares that are held in an ISA.
If you run your own company, the most tax-efficient way to draw down funds from the business in the form of a low salary, and the bulk of remaining funds in the form of dividends. Dividends are not subject to Employers’ NICs, whereas salaries are.
Distributing company dividends
To work out the total amount of dividends that can be distributed to company shareholders, you need to subtract the value of all company expenses from your turnover. Expenses include anything owed by the business, including taxes at any point in time.
These ‘retained earnings’ can be distributed as dividends to shareholders, and you must distribute the funds in line with the percentage shareholding each shareholder owns.
If you have retained profits brought forward from previous accounting periods, these can also be distributed as dividends.
Chances are, you already use some kind of online accounting software, such as FreeAgent. Assuming you keep your accounts up-to-date, you should be able to tell exactly what size of dividend distribution you can legally make from the company.
If you are unsure, make sure you get in touch with your accountant.
There are no rules governing how frequently you can distribute dividends, although many larger companies do so on a quarterly basis. It may suit you to distribute dividends to coincide with your VAT quarter, (if you are registered).
You may prefer monthly dividends for cashflow reasons, although some accountants we work with advise against this, as regular dividend payments might appear more akin to a ‘salary’ in all but name. HMRC could challenge regular payments, and re-assign them as ’employment income’, subject to Employers’ NICs.
The key thing is: you must only distribute the retained earnings of your company. If you distribute ‘ultra vires’ (illegal dividends), you may face the wrath of HMRC, and certainly the annoyance of your accountant.
Correct dividend paperwork
In order to comply with the rules which govern limited companies, you are required to prepare company board meeting minutes each time you declare a dividend. Each shareholder should be given a voucher which contains details of the distribution.
Once again, if you’re using one of the cutting-edge online accounting packages, this paperwork is likely to be auto-generated. Otherwise, ask your accountant for some templates to complete.
Dividend tax rates
The amount of tax you pay on dividends over your £1,000 dividend allowance (see below), is determined by your Income Tax Bands.
The tax rates payable on dividends are as follows for 2023/4;
- Personal Allowance (up to £12,570) – tax-free if your tax code is 1257L
- Basic Rate (£12,571 to £50,270) – 8.75% tax
- Higher Rate (£50,271 – £124,100) – 33.75%
- Additional Rate (over £125,140) – 39.35%
Dividend tax rates changed from April 2022
Following the Prime Minister’s tax hike announcement on 7th September 2021, the tax rates on dividends all increased by 1.25 percentage points from April 2022 onwards. You can find out more here.
Every individual receives a dividend allowance each year. This allows you to receive a certain amount of dividend income without any tax to pay.
For the 2023/24 tax year, the dividend allowance is £1,000. This means that you don’t need to pay tax on the first £1,000 of dividend payments you receive. You can find out more here.
How much dividend tax should I pay?
To show how this works in practice, let’s look at two examples;
Also read our guide to working out the best salary/dividend split for directors.
There’s a useful dividend tax calculator here.
Example 1 – Dividend tax for a Basic Rate taxpayer
James receives £8,000 in dividend payments in the 2022/23 tax year.
He receives other taxable income of £30,000.
To establish James’ Income Tax Rate band, he needs to add together all his income. His dividend income is £8,000 and his other taxable income is £30,000 so his total income is £38,000.
James’ total income is less than £50,270, so he is a Basic Rate taxpayer. The tax rate at which James will pay tax on his dividends is therefore 8.75%.
The Dividend Allowance for 2023/24 is £1,000. So, before calculating the tax to pay on his dividends, James can subtract this from the £8,000 he received in company dividends. He, therefore, needs to pay dividend tax on £7,000 (£8,000 – £1,000) of dividend income.
James now knows his dividend tax rate is 8.75%, and that he needs to pay this on £7,000 of dividends.
The amount of dividend tax James needs to pay is £612.50 (£7,000 @ 8.75%).
Example 2 – Dividend tax for a Higher Rate taxpayer
Let’s look at an example for a Higher Rate taxpayer;
Emma is a business owner. Her business is a limited company and she pays herself an annual salary of £15,000. She received dividend payments of £40,000 in the 2023/24 tax year.
To establish Emma’s Income Tax Rate band, she needs to add her dividend income (£40,000) to her other taxable income (£15,000). This totals £55,000, which is between £50,270 and £124,100 meaning that Emma is a Higher Rate taxpayer.
Emma therefore pays tax on her dividends at two different rates. She pays 8.75% on dividends up to the £50,270 Basic Rate taxpayer threshold and will need to pay 33.75% on the £4,730 of dividend income that is over the £50,270 threshold.
The Dividend Allowance for 2023/24 is £1,000. So, before calculating the tax to pay on her dividends, can subtract this from the £40,000 she received in company dividends. She, therefore, needs to pay dividend tax on £39,000 (£40,000 – £1,000) of dividend income.
Emma needs to pay 33.75% tax on the £4,730 of dividends over the £50,000 threshold, and 8.75% on the remaining £34,270 (£39,000 – £4,730).
Emma’s dividend tax can be calculated as;
£4,730 @ 33.75% = £1,596.38
£34,270 @ 8.75% = £2,998.63
Giving a total of £4,595 of tax to pay on her dividend income.
Notifying HMRC and paying tax on dividends
If you receive over £10,000 in dividends in the tax year, you will need to include your dividend income on your Self Assessment tax return. If you haven’t previously completed a tax return, you will need to register with HMRC.
If your dividend income is more than the £1,000 dividend allowance but less than £10,000, and you don’t normally file a Self Assessment tax return, you should contact HMRC. They may adjust your tax code so that the dividend tax you owe is taken from your salary.
You don’t need to notify HMRC if your dividend income is below the £2,000 dividend allowance.
You can read the official guide to tax on dividends at GOV.UK.
Finally, tax is a complex subject so you should always check with your accountant before acting on any of the information contained in this article.
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