Dividend tax rates 2024/25: A UK guide

As a business owner in the UK, how much money you can take from your company and put in your own pocket depends on a broad range of dividend tax rates.

To get the best bang for your buck a clever accountant will optimise how business owners are paid. We’ve outlined the best scenarios in two guides:

Salary or Dividend?

What is the most tax efficient way to extract cash from your business?

We’ll explain the procedures later if you’re not currently taking dividends as part of your earnings from your business.

But to really make the most of your take-home pay you need to be fully aware of UK dividend tax rates. Neil Ormesher, CEO of our London accountants, has put together this article to ensure you have everything you need to understand dividend tax rates in 2024/25.

Dividend allowance

Before we get into the different rates and how they come into effect, it’s important to understand that every individual receives a dividend allowance at the start of each tax year.

Dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. Further to that, the amount of dividend allowance is the same regardless of the tax bracket into which the recipient falls.

When individuals do not otherwise utilise the allowance, they can extract profits tax-efficiently from a family company

Although we term it an “allowance,” the dividend is actually a zero-rate band, and it taxes dividends covered by the allowance at a rate of 0%. Significantly, dividends covered by the allowance become part of band earnings.

The dividend allowance is the value of dividends an individual can earn before they are taxed.

In 2024/25 the dividend allowance is £500, half of what it was last year (£1,000 in 23/24) which is half of what it was the year before that (£2,000 in 22/23)

The tax you pay depends on the dividend tax rates below once you start earning above the dividend allowance.

 

Dividend tax rates

The current dividend tax rates have increased since 2022, lets quickly run through the new and old rates to see how they've changed.

The new basic rate is 8.75% an increase from 7.5%

The new higher rate is 33.75% an increase from 32.5%

Finally, the new additional rate is 39.35% an increase from 38.1%

With the reduction of the personal dividend allowance on top of these increases, we suggest you review with an accountant so you can withdraw cash from your business in the most efficient way possible.

But how do these rates apply in reality?

Well, that largely depends on your personal income allowance and how it’s used in conjunction with your dividends. For the 2024/25 tax year, personal allowance is £12,570 - this means an individual can earn up to £12,570 tax-free within the current tax year.

We would highly recommend enlisting the help of a tax accountant to ensure your calculations are accurate and tax trouble down the line doesn’t become a costly issue.

The bands are UK-wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.

Which dividend tax rates apply to me?

To understand which dividend tax rate applies to you, you must understand income tax rates first.

Generally speaking, the rate of income tax and subsequent amount of income tax you pay is calculated based on how much income you receive in a given tax year.

On that note, these are the income tax rates for the 2024/25 tax year:

• If you get less than £12,570, this falls within the personal allowance and you won’t pay any tax.

• Income between £12,571 and £50,270 is in the basic-rate tax bracket – 20%

• Income between £50,271 and £125,140 is in the higher-rate tax bracket – 40%

• Income above £125,140 is in the additional rate tax bracket – 45%

• Your personal allowance will also begin to be reduced by £1 for every £2 you earn over £100,000.

You can learn all about how much tax you pay on your salary earnings in our blog on how much you can earn before tax.

The government was going to change the income tax rates on 6th April 2023, following the announcement in the September 2022 Mini-Budget to the following:

• Income between £12,570 and £50,270 will be taxed at a lower basic rate - 19%

• Income between £50,270 and £150,000 will continue to be taxed at the same higher rate – 40%

• Income above £150,000 will no longer be taxed at an additional rate of tax of 45%. The additional rate has been abolished and any income above £150,000 will be taxed at 40%.

However, after backtracking shortly after, these changes were never brought into effect. Instead, the government has decided to go down the route of cutting national insurance, which is now at 8% down from 12% in 2022.  

Example of dividend tax

Here is a simple example of how dividends are taxed given by the government website:

Paying tax on dividends

How you pay tax on dividends depends on how much you earn as dividend income.

Those who are self-employed will most likely need to use their Self Assessment to inform HMRC of dividend earnings as anything over £10,000 must be included in the individual’s tax return.

If you earn under £10,000 in dividends, you will need to contact HMRC directly, or through your accountant, and have your tax code changed.

Procedures for taking dividends

As we’ve explained, taking dividends as part of your earnings from your business can be more tax-efficient than salary alone.

To issue dividends, your company must first be making sufficient profit to cover the dividend payments. Paying dividends is illegal if you don’t. You usually pay dividends from profits after accounting for Corporation Tax.

The pool of profits available for dividend payments can grow over a period of years if you and your fellow directors choose not to distribute profits and retain them in the business.

If you decide to take dividends or issue them to other directors or shareholders, you must hold a meeting of directors and ‘declare a dividend.' You must minute that decision and retain a record of it.

You can issue dividends at any time during your financial year, and you must issue and retain copies of dividend vouchers to cover:

• Your company name

• Names of recipients

• Amount of the dividend

• Date of payment

You can then decide on the most tax-efficient way to take your earnings.

Take professional advice

Our accountants in London are always on hand to help and are experts in tax treatments under the UK tax system, including dividend tax.

Need advice on dividend tax rates? Why not get in touch with the team to discuss how our wealth of experience can help you make the right decision when it comes to dividends?